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. Early distributions are those 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 your designated Roth IRA contributions are not subject to this 10% additional tax.
There are certain exceptions to this additional tax. There are exceptions that apply to distributions from any qualified retirement plan.
- Distributions made to a beneficiary or estate on or after the taxpayer's death. Such a distribution should have Distribution Code in Box 7 of 4 (Death) and would be normally be distributed to a non-spouse beneficiary within five (5) years of the date of death.
- Distributions made because the taxpayer is totally and permanently disabled. Such a distribution should have Distribution Code in Box 7 of Form 1099-R of 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 equal to or less than 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. For more information on medical expenses, refer to IRS Tax Topic 502.
- 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 made to the taxpayer 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 you reached age 50,
- Distributions after separation from service with your 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, and
- Distributions of dividends from employee stock ownership plans.
The 10% additional tax is reported on the appropriate line of Form 1040. Form 5329 must also be filed if:
- The distribution is subject to the tax, and distribution code 1 is not shown in the appropriate box of Form 1099-R, or
- One of the exceptions applies but the box labeled 'Distribution Code(s)' does not show a distribution code of '2', '3', or '4'. On the other hand, you do not need to file Form 5329 if your distribution is subject to the tax and a distribution code of '1' shows in the appropriate box. In this case enter the 10% additional tax on the appropriate line of Form 1040 and write 'NO' on the dotted line next to the appropriate line. To see a list of the distribution codes click Form 1099-R - Distribution Codes.
Distributions from a qualified retirement plan are subject to federal income tax withholding; however, if your distribution is subject to the 10% additional tax, your withholding may not be enough. You may have to make estimated tax payments.
If a taxpayer receives a distribution from a pension or annuity before age 59 1/2 they may be subject to an additional 10% penalty for the early distribution. When you enter the distribution code in the Form 1099-R entry menu, the program will prompt you to transfer the amount to Form 5329. If you do not select to transfer the amount when you initially enter the Form 1099-R, you can return to the Form 1099-R entry screen to manually transfer the distribution amount to Form 5329.
To enter information for Form 5329 in the tax program, from the Main Menu of the tax return (Form 1040) select:
- Income Menu
- IRA/Pension Distributions (1099R, RRB-1099-R, 8930)
- New or double-click the entry you wish to Edit.
If the entry has a Distribution Code of "1", "J" or "S" the Form 1099-R is Subject to Form 5329 Penalty. If the distribution amount qualifies for a penalty exclusion, you can select the exclusion description by answering YES to the onscreen prompt, "Does the Amount being Carried to Form 5329 Qualify for Any Penalty Exclusion?" If the distribution is from a pension plan or IRA, the transfer option should be "Transfer 1099-R Box 2a to Form 5329, Part I, Line 1".
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 for Early Withdrawal, answer YES, select the appropriate exclusion code, then enter the amount of the amount in Box 2a that qualifies for an exclusion.
Note: This is a guide on entering Form 5329 into the TaxSlayer Pro program. This is not intended as tax advice.