Question

on form 5329 an ira distribution penality execrption may not be used by a taxpayer who

Answer 1

IRS Form 5329

Form 5329, entitled "Additional Taxes on Qualified Retirement Plans (including IRAs) and Other Tax-Favored Accounts," is filed when an individual with a retirement plan or ESA needs to indicate whether they owe the IRS the 10% early-distribution or another penalty.3 The following are some transactions that may require the filing of Form 5329.

Early Distributions

An individual who receives a distribution from his or her retirement account before reaching age 59½ owes the IRS an early-distribution penalty (additional tax) of 10% of the distributed amount unless an exception applies.3

Generally, the issuer (the IRA or ESA custodian or qualified plan administrator) will indicate on Form 1099-R (used for qualified plans and IRAs) or Form 1099-Q (used for education savings accounts and 529 plans) whether the distributed amount is exempt from the early-distribution penalty.4 5 If an exception to the early-distribution penalty applies, the issuer should note it in Box 7 of Form 1099-R.

Up to $10,000 of an IRA early withdrawal that is used to buy, build, or rebuild a first home for an ancestor (parent or grandparent), yourself, a spouse, or you or your spouse's child or grandchild, may be exempt from the 10% penalty tax if you meet the IRS definition of a first-time home buyer.

Form 5329 exceptions to early withdrawal penalty codes are:

• 01 — Distributions from a qualified retirement plan (not an IRA) after separation from employment and after reaching age 55
• 02 — Distributions made as part of a series of substantially equal periodic payments — made at least annually. These distributions must be for:
  • Your life or life expectancy
  • The joint lives or joint life expectancies of you and your designated beneficiary

If the distributions are from an employer plan, payments must begin after separation from service.

• 03 — Distributions due to total and permanent disability
• 04 — Distributions due to death. This doesn’t apply to modified endowment contracts.
• 05 — Qualified retirement plan distributions that:
  • Were used to pay deductible unreimbursed medical expenses
  • Exceed 10% (7.5% if you or your spouse was age 65 or older) of your adjusted gross income (AGI)

You don’t have to itemize your deductions to claim the exception.

• 06 — Qualified retirement plan (not an IRA) distribution under a qualified domestic relations order
• 07 — IRA distributions made to individuals who were on unemployment compensation for 12 consecutive weeks to pay for health insurance premiums
• 08 — IRA distributions made for higher-education expenses
• 09 — IRA distributions made to buy your first home, up to $10,000
• 10 — Distributions due to an IRS levy on the qualified retirement plan
• 11 — Qualified distributions to reservists while serving on active duty for at least 180 days
• 12 — Other — see Form 5329 instructions. Also, use this code if more than one exception applies.

If you had economic losses as a result of certain federally declared disasters, you can exempt the 10% early distribution tax without filing Form 5329.