Form 5329 is one of the additional forms you'll have to file with your income tax return if certain circumstances apply to you. You may need to file Form 5329 if you contributed too much, took out too little or withdrew money from a retirement, educational or medical savings account for the wrong purposes.
Federal laws limit the amount of money you can contribute to certain types of accounts each year, including IRAs, Coverdell Education Savings Accounts, Medical Savings Accounts and Health Savings Accounts. If you contribute more than the legal limit, you must pay an additional tax when you file your income tax return. Form 5329 calculates the amount of tax you owe. Use Part III for excess contributions to traditional IRAs, Part IV for excess contributions to Roth IRAs, Part V for excess contributions to Coverdell ESAs, Part VI for excess contributions to Archer MSAs and Part VII for excess contributions to HSAs.
Certain types of accounts offer tax benefits to encourage saving for future expenses, including IRAs for retirement and Coverdell and qualified tuition programs for higher education. To discourage people from using these accounts for other purposes, the IRS imposes a 10 percent penalty on non-qualified distributions. For example, if you take money out of your traditional IRA at age 45, the IRS tacks on an extra 10 percent penalty tax on to the taxes already imposed on the distribution. Part I of Form 5329 calculates the amount of the penalty on these non-qualified distributions for IRAs and Part II calculates the penalty for educational accounts.
Failure to Take Required Minimum Distributions
IRAs, other than Roth IRAs, require you to start taking money out of the account each year when you turn 70 1/2 years old. If you fail to take your required minimum distribution, known as an "excess accumulation," you owe a tax equal to 50 percent of the amount you failed to withdraw. You calculate the penalty on Part VIII of Form 5329 by subtracting the amount you actually withdrew from the amount you should have taken out and multiplying the remainder by 50 percent.
Filing Form 5329
If any of the above mistakes apply to you, you must file Form 5329 with your income tax return to calculate the penalty that you owe. The IRS only requires you to fill out the section that applies to you. For example, if you took an early distribution from your IRA, you only need to complete Part I. Usually, you must use Form 1040 to file your tax return if you file Form 5329. However, if you aren't otherwise required to file a return, you can simply file Form 5329 alone, according to the IRS. Just include your address on the first page, your signature and date on the second page and enclose payment for the penalty. For example, if you have no income other than a $1,000 early IRA distribution, you don't have to file Form 1040, but you do owe an early withdrawal penalty.