Additional Tax on IRAs, other Qualified Retirement Plans

Many investors take advantage of the terrific tax benefits associated with Individual Retirement Accounts (“IRAs”) and other retirement plans. With such benefits, though, come certain mandates an investor must follow in order to preserve the preferential tax treatment. Line 58 of Form 1040 is the place where the IRS penalizes retirement account investors who fail to satisfy certain requirements. A retirement plan investor falling under any of the following four scenarios must complete Form 5329 to determine the amount of Line 58 taxation penalties he/she may face:

(1) Taxpayer received an early distribution from (i) an IRA or other qualified retirement plan, (ii) an annuity, or (iii) a modified endowment contract entered into after June 20, 1988 (if the total distribution was rolled over via a qualified rollover contribution, the taxpayer need not complete Form 5329)
(2) Excess contributions were made to taxpayer’s IRAs, Coverdell education savings accounts (ESAs), Archer MSAs, or health savings accounts (HSAs)
(3) Taxpayer received taxable distributions from Coverdell ESAs or qualified tuition programs
(4) Taxpayer was born before July 1, 19421 and did not take the minimum required distribution from his/her IRA or other qualified retirement plan

NOTE: If a taxpayer received an early distribution (see (1) above) but (2), (3), or (4) do not apply, the taxpayer need not complete Form 5329 so long as the corresponding Form 1099-R (sent to taxpayer in association with the early distribution) shows “distribution code 1” in Box 7. Instead, the taxpayer should multiply the taxable amount of the distribution (see Form 1040, Line 15b or Line 16b) by 10% and enter that value on Line 58 of Form 1040. For more information on understanding a Form 1099-R, please see the Form 1099-R Instructions.

1The IRS requires individuals to beginning taking withdrawals (distributions) from their tax-deferred IRAs when the individual turns 70 1/2 years old

Photo by: Ian MacKenzie