Form 5329 is completed in order to inform the IRS whether or not a person owes a 10% penalty for early distribution. Typically, the forms are filled out by those with a retirement plan or education savings account (ESA).
What is Considered Early Distributions?
The IRS defines early distribution as any person under the age of 59.5 who accesses funds from their retirement account. The penalty includes 10% of the amount that was distributed from the account. While this is one of the primary reasons that people have to pay this penalty, there are other instances in which a person needs to complete form 5329 such as:
- When a person receives an amount of money from their retirement plan that is excused from the penalty, but the specific penalty is not listed on Form 1099-R.
- If a person mistakenly believes that their distribution was exempt from penalties, the individual is still required to completely the first part of Form 5329.
- When a person receives money from an ESA account, but the funds were not used for educational purposes, the individual must complete the second part of form 5329.
Form 5329 Rules
Form 5329 outlines very specific requirements for individuals with an accessible retirement plan. In order to avoid being penalized or paying extra fees, people must follow these rules:
- A requirement account must meet the required distribution amounts once the funds can be withdrawn and continue to meet that requirement for every year following the start date of distribution. Failure to comply will result in the IRS demanding 50% of the cost to reach the minimum distribution requirement.
- IRA an plan trustees are unable to pay penalties on the behalf of the taxpayer.
- All forms must be completed by the due date of taxes each year.
Individuals that are required to complete form 5329 must be completed thoroughly and correctly as it will decide the amount of penalties that you owe to the IRS. Failure to adhere to the guidelines may result in a number of fees which will collect interest.