Concise Takeaway
Tax‑favored accounts receive special tax benefits, but excess contributions, early distributions, and missed required minimum distributions can trigger additional taxes calculated on Form 5329.
Tax‑Favored Accounts Covered
Additional taxes may apply to:
- IRAs
- Qualified retirement plans
- Coverdell ESAs
- Qualified Tuition Programs (QTPs)
- Archer MSAs
- HSAs
- ABLE accounts
Form 5329 is used to calculate taxes on excess contributions, early distributions, and excess accumulation.
Excess Contributions
A 6% excise tax applies each year an excess contribution remains in:
- Traditional IRAs
- Roth IRAs
- Coverdell ESAs
- Archer MSAs
- HSAs
- ABLE accounts
The tax applies unless the taxpayer withdraws:
- The excess contribution, and
- Any earnings on the excess
by the return due date (including extensions).
Earnings must be included in gross income for the year the excess contribution was made.
Excess contributions cannot be applied to prior years but may be applied to future years if contribution limits allow.
Early Distributions Before Age 59½
Withdrawals before age 59½ from:
- Traditional IRAs
- Roth IRAs
- SEP IRAs
- SIMPLE IRAs
- Qualified plans
are generally subject to a 10% additional tax on the taxable portion.
SIMPLE IRA 2‑Year Rule
If a SIMPLE IRA distribution occurs within 2 years of first participation:
- The additional tax increases to 25%
- Applies unless an exception applies
Exceptions for Any IRA or Qualified Plan
Exceptions include:
- Death of the account owner
- Total and permanent disability
- Substantially equal periodic payments
- Unreimbursed medical expenses > 7.5% AGI
- IRS levy
- Qualified military reservist distributions
- Qualified disaster recovery distributions (up to $22,000)
- Qualified birth or adoption distributions (up to $5,000 per child)
- Domestic abuse victim distributions (up to the lesser of $10,300 or 50% of account balance)
- Emergency personal expense distributions (one per year, up to $1,000 or account balance over $1,000)
Exceptions for Qualified Plans Only
These apply only to qualified plans:
- Separation from service at age 55 or later (age 50 for public safety employees)
- QDRO distributions to an alternate payee
- Terminal illness distributions
- Pension‑linked emergency savings account distributions
- Corrective distributions of excess contributions or deferrals
Exceptions for IRAs Only
These apply only to IRAs:
- First‑time homebuyer distributions (up to $10,000)
- Qualified higher education expenses
- Health insurance premiums while unemployed
- Returned IRA contributions withdrawn by the extended due date
Rollovers and transfers are not subject to the 10% tax if completed properly.
Roth IRA Distribution Rules
A Roth IRA distribution is qualified if:
- It occurs after the 5‑year period, and
- One of the following applies:
- Age 59½
- Death
- Disability
- First‑time homebuyer exception
Ordering Rules for Non‑Qualified Distributions
Withdrawals occur in this order:
- Regular contributions
- Conversion and rollover contributions
- Taxable portion first
- Nontaxable portion second
- Earnings
Only taxable conversion amounts and earnings may be subject to the 10% tax.
Excess Accumulation (RMD Shortfall)
A 25% excise tax applies when a taxpayer fails to take the required minimum distribution (RMD).
The tax may be reduced to 10% if the shortfall is corrected during the correction window.
Roth IRAs are not subject to RMDs during the owner’s lifetime.
RMD Age
The required minimum distribution age is 73.
Required Beginning Date
- First RMD: April 1 of the year after reaching age 73
- Subsequent RMDs: December 31 each year
Delaying the first RMD may cause two taxable distributions in one year.
RMD Calculation
RMD = Prior year‑end account balance ÷ Life expectancy factor
Life expectancy factors come from:
- Uniform Lifetime Table
- Joint Life Table (if spouse is >10 years younger)
Tax‑Favored Account Flow Summary
- Identify excess contributions, early distributions, or RMD shortfalls
- Apply correct tax (6%, 10%, 25%, or 10% reduced rate)
- Determine whether an exception applies
- Calculate tax on Form 5329
- Report total on Schedule 2