Understanding Form 5329: Additional Taxes on Tax-Favored Accounts

The Internal Revenue Service confirmed in mid-2025 that Form 5329 will continue to be the tool taxpayers use to report and calculate additional taxes tied to tax-favored accounts. The decision matters for millions in the United States 🇺🇸, including immigrants and cross‑border workers who hold retirement, education, or health savings funds while moving in and out of the U.S. tax system.

The form covers penalties for early withdrawals, excess contributions, and missed required minimum distributions (RMDs). It remains central to how the IRS tracks compliance across IRAs, 401(k)-type plans, 529 plans, HSAs, Archer MSAs, Coverdell ESAs, and ABLE accounts.

Core penalties and filing notes

At the core, the IRS applies three main penalties that flow through Form 5329:

• 6% additional tax on excess contributions (applies each year an excess remains).
• 10% additional tax on early distributions (generally for distributions before age 59½, unless an exception applies).
• Penalties for excess accumulation when RMDs are missed (see details below).

According to the latest instructions, taxpayers can still claim exceptions to the 10% early distribution penalty on the form. When a payer reports an early distribution with distribution code 1 on Form 1099‑R and the full 10% penalty applies, the IRS allows the taxpayer to skip filing Form 5329 and report the penalty directly on Schedule 2 (Form 1040). For many filers, this small process change can save time while keeping returns accurate.

Accounts covered

The scope of tax-favored accounts covered has not changed. The form still applies to:

• Individual Retirement Accounts (IRAs)
• Other qualified retirement plans (such as 401(k)s)
• Coverdell Education Savings Accounts (Coverdell ESAs)
• Qualified Tuition Programs (QTPs or 529 plans)
• Archer Medical Savings Accounts (Archer MSAs)
• Health Savings Accounts (HSAs)
• Achieving a Better Life Experience (ABLE) accounts

2025 draft instructions and continuity

The IRS released draft 2025 instructions and a draft 2025 version of Form 5329 earlier this year, signaling continuity rather than an overhaul. No major legislative changes since 2024 have shifted the basic structure of the penalties.

The government still expects taxpayers to report early withdrawals, excess contributions, and missed RMDs on the form, or to claim the matching exception where allowed. According to analysis by VisaVerge.com, the steady approach means filers should focus on clean documentation and timely corrections rather than expecting sweeping rule changes.

Key takeaway: Expect stability — keep documentation current and correct mistakes quickly.

Penalty framework (summary)

• Excess contributions: A 6% additional tax applies each year an excess remains in a tax-favored account. The excise tax continues annually until the excess is removed or corrected.
• Early distributions: A 10% additional tax applies to most early withdrawals from qualified retirement plans and IRAs before age 59½, unless an exception fits the situation. The 10% penalty can also apply to nonqualified withdrawals from Coverdell ESAs, QTPs, and ABLE accounts when funds are not used for qualified expenses.
• Excess accumulation: The form also covers penalties tied to RMD failures from qualified retirement plans, including IRAs. Source material notes a 25% additional tax on excess accumulation, while also referencing a 50% excise tax on missed RMDs under prior or other rules. The filing path is the same: calculate the penalty on Form 5329 and request relief where instructions allow.

Exceptions and reporting nuances

Taxpayers who claim an exception to the 10% early distribution penalty need to file Form 5329 to report that exception. Common exceptions include:

• Disability
• Qualified education costs
• First‑time home purchase (up to $10,000 from an IRA)
• Certain medical expenses
• An IRS levy
• Qualifying reservist distributions

Each exception has a code that must be entered on the form.

When a payer issues Form 1099‑R with distribution code 1 and the 10% penalty applies in full, the IRS says the filer does not need to submit Form 5329. Instead:

• Enter the 10% penalty directly on Schedule 2 (Form 1040).
• Check the box to show the form is not required.

If a couple files jointly and both spouses owe additional tax tied to their separate accounts, each spouse completes a separate Form 5329, and the combined amount is carried to Schedule 2 (Form 1040) with the main return.

Beyond retirement accounts, Form 5329 also computes additional taxes on certain distributions from education accounts (Coverdell ESAs and QTPs) and ABLE accounts. If withdrawals do not meet the “qualified expense” rules, the nonqualified portion can trigger penalty exposure on the form.

Resources

Taxpayers can obtain Form 5329 and its instructions from the IRS directly. Official resources:

• IRS Form 5329: https://www.irs.gov/forms-pubs/about-form-5329
• Schedule 2 (Form 1040): https://www.irs.gov/forms-pubs/about-schedule-2-form-1040
• Form 1099‑R (retirement distributions): https://www.irs.gov/forms-pubs/about-form-1099-r

Human impact: immigrants, global families, and cross‑border workers

For newcomers building a life in the United States 🇺🇸, these rules can hit in quiet but expensive ways. Examples:

• A work visa holder who cashes out a 401(k) before age 59½ may face the 10% additional tax on top of regular income tax. If later eligible for an exception, Form 5329 is how they claim it.
• A family with a 529 plan that uses funds for nonqualified expenses while living abroad may face a penalty reported on the form.
• A green card holder who reaches RMD age and forgets to take the yearly IRA withdrawal risks a steep penalty for excess accumulation, computed on Form 5329.

In each case, the form is not an abstract tax document — it’s the gatekeeper for relief or the bill for a mistake.

Consider three common cross‑border scenarios:

• A departing professional closes an HSA after moving overseas, then uses funds for non‑medical costs. Nonqualified HSA withdrawals face income tax and can trigger the 10% penalty, calculated through Form 5329.
• A graduate student withdraws from a Coverdell ESA to pay living costs that don’t count as qualified education expenses. The nonqualified portion may face tax and the additional taxes reported on the form.
• A retiree who splits time between countries misses an RMD from a U.S. IRA. The penalty for excess accumulation is computed on Form 5329, and the taxpayer can ask for a waiver if reasonable cause exists.

The IRS continues to allow waiver requests for certain penalties through Form 5329, including relief for missed RMDs or excess contributions when the taxpayer fixes the problem and explains the reasons. While relief is not guaranteed, it can save families large sums and helps many who face language barriers or juggle rules from more than one country.

Practical prevention and filing steps

Practical steps to help prevent costly penalties:

• Track yearly contribution limits for IRAs, HSAs, and education accounts to avoid the 6% additional tax on excess contributions.
• Avoid early withdrawals where possible, or check for an exception before taking funds.
• For those at RMD age, set reminders or use automatic withdrawals with the plan custodian to avoid excess accumulation penalties.
• Keep all distribution statements and note any Form 1099‑R code 1 entries; this affects whether Form 5329 is required or the penalty can go on Schedule 2.

From a compliance perspective, the filing sequence remains familiar:

1. Decide whether you owe an additional tax for early distributions, excess contributions, or missed RMDs.
2. Get Form 5329 and its instructions from the IRS site.
3. Complete the relevant sections:
   • Part I for early withdrawals and exceptions
   • Part II for excess contributions
   • the section for missed RMDs
4. Attach the form to your Form 1040.
5. If filing jointly and both spouses owe, each files a separate Form 5329; totals flow to Schedule 2 (Form 1040).
6. If an early distribution is fully subject to the 10% penalty and was reported with code 1 on Form 1099‑R, enter the penalty on Schedule 2 and check the box to show the form isn’t needed.
7. If seeking relief, follow the instructions for waiver requests within the form.

Tax software firms continue to support these entries, and many taxpayers rely on that guidance. But final responsibility rests with the filer. As VisaVerge.com reports, steady rules do not mean small stakes — penalties compound year after year for excess contributions, and a single missed RMD can create a large bill. The most effective strategy is simple: contribute within the limits, document any early withdrawals, and fix errors quickly.

Final note

For official direction, the IRS’s About page for Form 5329 and the instructions remain the best reference point. The form’s role is not limited to retirement accounts; it also touches education and disability-related savings for families who depend on those funds.

By keeping Form 5329 in place for 2025 filings, the IRS has signaled that the framework for additional taxes on tax-favored accounts will remain stable in the near term — giving taxpayers, employers, and plan custodians a clear playbook.