Internal Revenue Service United States Department of the Treasury
Level Basic Intermediate Advanced Military International

Other Taxes

Qualified Retirement Plans

Distributions, Pensions, and Annuities

Volunteers need to be aware of the exceptions to the additional tax on early distributions and complete Form 5329, Part I, if an exception applies:

  • Form 5329, line 1, is the amount of the distribution included in income.
  • Line 2 is the amount that qualifies for the exception and where the applicable code is entered. Refer to the Volunteer Resource Guide (Tab 6) for a screen shot of Form 5329, Part I, and the exceptions. For additional information, see Form 5329 Instructions.
  • Line 3 (line 2 subtracted from line 1) is the amount subject to the additional tax.
  • Line 4 is the additional tax carried over to the Other Taxes section of the return.

Taxpayers frequently use an early distribution for household expenses or bills that are not on the list of exceptions. This situation does not require completion of Form 5329.

IRA distributions, pensions, and annuities are covered in the Retirement Income lesson. If you are not certified above the Basic level, refer taxpayers with these issues to a volunteer who is certified at the Intermediate level or higher.

Caution

Be sure to note that some exceptions apply only to IRA distributions, some apply only to distributions from a qualified retirement plan, and some exceptions apply to both IRA and retirement plan distributions.

Tip

If Form 1099-R correctly shows code 1 in box 7 indicating an early distribution, the additional tax usually applies. Guidelines permit entering 10% of the taxable amount directly on Form 1040, line 58. "No" is entered to the left of line 58 to indicate Form 5329 is not required. The tax software does this automatically, based on entries on Form 1099-R.

Example

John, who is 39 years old, received Form 1099-R with code 1 in box 7. He used the money to pay for car repairs. For the additional tax, enter 10% of the taxable amount on the applicable line of Form 1040. The word "no" appears to the left of that line to indicate that Form 5329 is not required.

Example

Laura is 41 years old and received an early distribution from her 401(k) account. The volunteer determines that Laura used the money for unreimbursed qualified medical expenses that meet the requirements for code 05. In this case Form 5329, Part I, would be completed. Laura would not have to pay the additional tax on this distribution.