Form 5329 – Exceptions
The additional tax on early distributions doesn’t apply to certain distributions. On line 2 of Form 5329, enter 01-23 to indicate the exception (If more than one exception applies, enter 99). Report the amount that you can exclude from the additional tax.
See IRS Instructions for Form 5329 Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts for more information.
Hardship Exception
If you received a retirement plan or IRA distribution that qualifies for an exception to the 10% additional tax on early distributions, you may be able to claim it on Form 5329. This applies when the distribution is not considered “early” under IRS rules, even if you are under age 59½.
If you qualify for a hardship exemption related to additional tax on your retirement income, you will need to enter Form 1099-R and Form 5329. See the FAQs Form 1099-R – Entering Distributions from Retirement Plans and Form 5329 – Entering in Program for details.
When a Hardship Exception Applies
The IRS lists several qualifying reasons. Common examples include:
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Separation from service after age 55 (or age 50 for certain public safety employees/private sector firefighters)
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Series of substantially equal periodic payments for your life or joint lives.
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Total and permanent disability
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Death of the participant/IRA owner
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Qualified higher education expenses
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First home purchase — up to $10,000 for an IRA.
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Unemployment for health insurance premiums — certain unemployed individuals.
You can find additional information in the IRS Topic No. 558 Additional Tax on Early Distributions from Retirement Plans Other than IRAs and Retirement Plans FAQs regarding Hardship Distributions webpages.
Qualified Education Expenses Exception
Exception No. 08 on Form 5329 allows certain IRA distributions before age 59½ to be exempt from the 10% additional early-distribution tax if the funds are used for qualified higher education expenses
The qualified education expenses must not include amounts paid using grants, scholarships, or other tax-free benefits.
See Publication 970 Tax Benefits for Education for more information.
Education Exception to Additional Tax on Early IRA Distributions
Who Is Eligible?
You can claim the deduction if, for the year of the distribution, you pay qualified education expenses for:
- yourself;
- your spouse;
- your or your spouse’s child, foster child, or adopted child; or
- your or your spouse’s grandchild.
Qualified Education Expenses
For purposes of the 10% additional tax, these expenses are tuition, fees, books, supplies, and equipment required for enrollment or attendance at an eligible educational institution. They also include expenses for special needs services incurred by or for special needs students in connection with their enrollment or attendance.
In addition, if the student is at least a half-time student, room and board are qualified education expenses. The expense for room and board qualifies only to the extent that it isn’t more than the greater of the following two amounts:
- The allowance for room and board, as determined by the eligible educational institution, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student.
- The actual amount charged if the student is residing in housing owned or operated by the eligible educational institution.
You may need to contact the eligible educational institution for qualified room and board costs.
Qualified Medical Expenses Exception
Exception No. 05 on Form 5329 applies to certain qualified retirement plan distributions that are excluded from the 10% additional early distribution tax because they are used to pay for unreimbursed medical expenses.
If you received a distribution from a qualified retirement plan (such as a 401(k), 403(b), 457 plan, or other non-IRA qualified plan) and the amount you used to pay for unreimbursed medical expenses during the tax year is less than or equal to the sum of:
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Your unreimbursed medical expenses for the year, minus
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7.5% of your Adjusted Gross Income (AGI) for the year,
then you can exclude that portion of the distribution from the additional tax
Please see Topic No. 502 Medical and Dental Expenses or IRS Publication 502 Medical and Dental Expenses (Including the Health Coverage Tax Credit) for details about which medical expenses qualify.