IRS Form 5329-t: a Tax for When You Don’t Follow the Rules

The IRS doesn’t like it when you break the rules.  In fact, it drives them crazy and makes them lash out at taxpayers…audits, penalties, fines you name it they’re going to get you if you break the rules.  This is especially true when they are generous, and we throw that back in their face.  What is the world is this all about?  We’re talking about tax-favored accounts (the gift from the IRS), which come with stipulations (the “rules”).  When we break the rules on those tax-favored accounts, the IRS says pay up.  That’s where IRS Form 5329-t comes in.

IRS Form 5329-t is for Tax-Favored Accounts: What’s a Tax-Favored Account?

A tax-favored account is a savings account or retirement account that comes with tax-related incentives.  That means, it’s a account that’s good for you so the IRS gives you a tax break on the money you put into it.  For example, an Individual Retirement Account (IRA) is good for you because you’re saving for your retirement.  The more you save for old age, the less the government will have to worry about your sorry self wandering the streets and taking up taxpayer money because you didn’t plan for retirement.

Another example of a tax-favored account is a Coverdell Education Savings Account (ESA).  The money you put into these accounts is tax-free.  It’s a tax deduction, in other words.  But you’re only supposed to use the money in those accounts for education-related expenses.  The IRS has tight stipulations on this…if you withdraw money from your Coverdell and use it for something other than what it’s meant to be used for, you’ll have to pay taxes on that withdrawal.  Enter IRS Form 5329-t, once again.

Or let’s say you love your IRA so much you contributed more than the limit.  IRA contributions are limited to around $5000 per year (it goes up a bit each year).  If you go over the limit, IRS Form 5329-t is for paying the additional tax you’ll owe because you broke the IRA contribution limit rules.  Starting to get the picture?

There are also several types of Medical (Health) Savings Accounts which have rules: you can deduct the contributions but you must use that money for qualified medical costs only.  Otherwise, get yourself a copy of IRS Form 5329-t and pay the additional tax.

IRS Form 5329-t is really IRS Form 5329

The form you want is actually IRS Form 5329.  There is no “t”.  It’s called Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts.  It’s not that difficult a form, just two pages long.  You only fill out the parts that apply to your type of Tax-Favored account.  Here are the types of accounts on which if you  break the rules you’ll have to use IRS Form 5329 to pay additional taxes:

  • Excess Contributions to Archer Medical Savings Accounts (MSAs)
  • Excess Contributions to Health Savings Accounts (HSAs)
  • Excess Contributions to Coverdell ESAs
  • Excess Accumulation in Qualified Retirement Plans (including IRAs)*
  • Excess Contributions to Roth IRAs
  • Excess Contributions to Traditional IRAs
  • Early Distributions on your IRA
  • Certain Distributions from Education Accounts

*IRAs have one more rule: once you hit retirement age, you MUST start withdrawing money from your tax-favored retirement account.  If you don’t do this, it’s called excess accumulation and you must use IRS Form 5329 to pay the additional tax you now owe.  Pretty stupid not to take those required distributions, isn’t it?