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Understanding exceptions to Form 5329, Additional Tax on Early Distributions

by Intuit•1• Updated 3 months ago

What's new for Form 5329 for tax year 2023:

Certain corrective distributions not subject to 10% early distribution tax. Beginning on December 29, 2022, the 10% additional tax on early distributions will not apply to a corrective IRA distribution, which consists of an excessive contribution (a contribution greater than the IRA contribution limit) and any earnings allocable to the excessive contribution, as long as the corrective distribution is made on or before the due date (including extensions) of the income tax return
Qualified disaster distributions. The additional tax on early distributions doesn't apply to qualified disaster distributions nor does it apply to qualified disaster recovery distributions. See Publication 590-B for more details.
Maximum age for traditional IRA contributions. The age restrictions for contributions to a traditional IRA has been eliminated.

This table explains exceptions to Form 5329, Additional Tax on Early Distributions, to assist you with entering this information in ProSeries.

Refer to the IRS Instructions for Form 5329 for more information.

Exception no.	IRS description of exception
01	Qualified retirement plan distributions (doesn’t apply to IRAs) you receive after separation from service when the separation from service occurs in or after the year you reach age 55 (age 50 for qualified public safety employees).
02	Distributions made as part of a series of substantially equal periodic payments (made at least annually) for your life (or life expectancy) or the joint lives (or joint life expectancies) of you and your designated beneficiary (if from an employer plan, payments must begin after separation from service).
03	Distributions due to total and permanent disability. You are considered disabled if you can furnish proof that you can’t do any substantial gainful activity because of your physical or mental condition. A medical determination that your condition can be expected to result in death or to be of long, continued, and indefinite duration must be made.
04	Distributions due to death (doesn’t apply to modified endowment contracts).
05	Qualified retirement plan distributions up to the amount you paid for unreimbursed medical expenses during the year minus 7.5% of your adjusted gross income (AGI) for the year.
06	Qualified retirement plan distributions made to an alternate payee under a qualified domestic relations order (doesn’t apply to IRAs).
07	IRA distributions made to certain unemployed individuals for health insurance premiums.
08	IRA distributions made for qualified higher education expenses.
09	IRA distributions made for the purchase of a first home, up to $10,000.
10	Qualified retirement plan distributions made due to an IRS levy.
11	Qualified distributions to reservists while serving on active duty for at least 180 days.
12	Distributions incorrectly indicated as early distributions by code 1, J, or S in box 7 of Form 1099-R. Include on line 2 the amount you received when you were age 591/2 or older.
13	Distributions from a section 457 plan, which aren’t from a rollover from a qualified retirement plan.
14	Distributions from a plan maintained by an employer if: 1. You separated from service by March 1, 1986; 2. As of March 1, 1986, your entire interest was in pay status under a written election that provides a specific schedule for the distribution of your entire interest; and 3. The distribution is actually being made under the written election
15	Distributions that are dividends paid with respect to stock described in section 404(k).
16	Distributions from annuity contracts to the extent that the distributions are allocable to the investment in the contract before August 14, 1982. For additional exceptions that apply to annuities, see Tax on Early Distributions under Special Additional Taxes in Pub. 575.
17	Distributions that are phased retirement annuity payments made to federal employees. See Pub. 721 for more information on the phased retirement program.
18	Permissible withdrawals under section 414(w).
19	Qualified birth or adoption distributions. Attach a statement that provides the name, age, and TIN of the child or eligible adoptee.
20	Enter this code if more than one exception applies.

Example

I have a 1099-R with a code 1 for a SIMPLE plan, and the taxpayer qualifies for an exception 1 to avoid the 10% penalty. On Form 5329, under line 1, the Distributions not subject to Additional Tax Smart Worksheet, column B for SIMPLE distributions, line A is grayed out.

In general, if the taxpayer receives an early distribution (including an involuntary cash-out) from an IRA, other qualified retirement plan, or modified endowment contract, the part of the distribution included in income generally is subject to an additional 10% tax.

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