Desktop: Form 5329 - Tax on Early Distribution – Support

Overview

To discourage the use of pension funds for purposes other than normal retirement, a 10% additional tax is imposed on certain early distributions of retirement plan funds. An early distribution is a distribution a taxpayer receives from a qualified retirement plan or deferred annuity contract before reaching age 59-1/2.

The term "qualified retirement plan" means:

A qualified employee plan such as a 401(k) plan;
A qualified employee annuity plan under section 403(a);
A tax–sheltered annuity plan under section 403(b) for employees of public schools or tax–exempt organizations; or
An eligible state or local government section 457 deferred compensation plan (to the extent that any distribution is attributable to amounts the plan received in a direct transfer or rollover from one of the other plans listed here or an IRA)

Distributions that are not taxable, such as distributions rolled over to another qualified retirement plan or a distribution of designated Roth IRA contributions, are not subject to this 10% additional tax.

The 10% additional tax is reported on the appropriate line of Schedule 2 (Form 1040).

When Form 5329 is needed

Form 5329 must be filed if any of the following apply:

The taxpayer received a distribution from a Roth IRA and either (a) the amount on Form 8606 line 25c is more than zero, or (b) the distribution includes a recapture amount subject to the 10% additional tax, or (c) it’s a qualified first-time homebuyer distribution.
The taxpayer received a distribution subject to the tax on early distributions from a qualified retirement plan (other than a Roth IRA). Exception: If the box 7 distribution code is 1, you can enter the 10% additional tax on the appropriate line of Schedule 2 (Form 1040) and indicate "No" to filing the form.
The taxpayer received a distribution subject to the tax on early distributions from a qualified retirement plan (other than a Roth IRA) and they meet an exception to the tax on early distributions, but Form 1099-R box 7 doesn't indicate an exception or the exception doesn’t apply to the entire distribution.
The taxpayer received a taxable distribution from a Coverdell ESA, QTP, or ABLE account.
The contributions for the tax year to their traditional IRAs, Roth IRAs, Coverdell ESAs, Archer MSAs, HSAs, or ABLE accounts exceeded their maximum contribution limit, or they had a tax due from an excess contribution on line 17, 25, 33, 41, or 49 of their prior year Form 5329.
They didn’t receive the minimum required distribution from their qualified retirement plan.

Exceptions to the tax

There are certain exceptions to the additional tax on early distributions:

Distributions made to a beneficiary or estate on or after the taxpayer's death. Such a distribution should have a box 7 distribution code of 4 (Death) and would be normally be distributed to a non-spouse beneficiary within five years of the date of death.
Distributions made because the taxpayer is totally and permanently disabled. Such a distribution should have a box 7 distribution code of 3 (Disability).
Distributions made as part of a series of substantially equal periodic payments over the life expectancy of the owner or life expectancy of the owner and the beneficiary. If these distributions are from a qualified plan other than an IRA, the taxpayer must separate from service with this employer before the payments begin for this exception to apply.
Distributions that are less than or equal to the deductible medical expenses, that is, the amount of medical expenses that is more than 7.5% of the AGI. The taxpayer does not have to itemize to meet this exception.
Distributions made due to an IRS levy of the plan.

The following additional exceptions only apply to distributions from a qualified retirement plan other than an IRA.

Distributions after separation from service with their employer (state or local government), if the separation occurred in or after the year they reached age 55, or distributions from qualified governmental defined benefit plans if they were a qualified public safety employee who separated from service on or after reaching age 50.
Distributions made to an alternate payee under a qualified domestic relations order (QDRO).
Distributions of dividends from employee stock ownership plans.

Carrying Form 1099-R distribution to Form 5329

If you enter Form 1099-R with a Box 7 distribution code of 1, J, or S, you'll be asked what amount to transfer to Form 5329, and you'll generally select to carry box 2a to Form 5329. You will then be asked "Does the Amount being Carried to Form 5329 Qualify for Any Penalty Exclusion?" If the taxpayer is claiming an exclusion from the 10% additional tax, answer Yes, select the appropriate exclusion code, then enter the amount that qualifies for an exclusion.