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By Joe Cicchinelli, IRA Technical Expert
The IRS recently released the 2014 version of Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts. The form, along with the accompanying instructions, is updated each year and is filed by the IRA owner to report certain penalty taxes they may owe with respect to their IRA.
You generally need to file IRS Form 5329 if you received an early distribution from your IRA in 2014 and are subject to the IRS 10% early distribution penalty. An early distribution is a distribution you took before you reached age 59 ½. You would be subject to the 10% penalty on an early IRA distribution if no exception to the penalty applied. The exceptions to the penalty are rollovers, death (distributions to beneficiaries), disability, substantially equal periodic payments (72(t) payments), deductible medical expenses, first-time home buyer, higher education, Roth IRA conversions, IRS tax levy, and health insurance if you were unemployed. However, if distribution code 1 (early distribution no known exception) is correctly shown in box 7 of all of your Forms 1099-R, and you owe the 10% penalty, you do not have to file Form 5329. Instead, see the instructions for your federal income tax return (IRS Form 1040) line 59 for how to report the 10% additional tax directly on that line.
You would also file Form 5329 to pay the 6% penalty on excess IRA contributions and the 50% excess accumulation penalty for not taking your required minimum distribution (or not taking all of it).
Some tax pros are recommending that you file Form 5329 each year, even if you don’t owe any penalty taxes. The reason is because Form 5329 is considered a stand-alone tax return. If you don’t file a 5329, there is no statute of limitations for the IRS to go back and assess the penalties you might owe for the year. Generally, the statute of limitations for income taxes and penalties is three years from when you file your tax return or from the due date of that return, if that is later. But if you don’t file Form 5329, the IRS can potentially come after you well after three years as some very unhappy taxpayers have discovered.
Material discussed is meant to provide general information and it is not to be construed as specific investment, tax or legal advice. Neither United Planners nor its financial professionals render legal or tax advice. Please consult with your accountant or tax advisor for specific guidance.