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Dec 5, 2025
Dec 5, 2025
Form 5329 Guide: How to Report Additional Taxes and Claim Penalty Exceptions
Navigating Form 5329 can feel like a maze, especially for startup founders and operators who juggle multiple priorities.
This guide breaks down what Form 5329 covers, common scenarios when you might need it, how to claim exceptions to avoid costly penalties, and best practices for filing. With practical examples and pointers tailored to founders and business leaders, you’ll walk away ready to make informed decisions or effectively delegate this task.
What Is Form 5329 and Why Founders Should Care
Form 5329, officially titled "Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts," is used to report and pay additional taxes related to retirement accounts and other tax-advantaged savings.
While it might sound like something only individual taxpayers worry about, it can have meaningful implications for founders and teams managing company benefits, owner retirement savings, and personal financial strategies that intersect with business tax planning.
Founders should care because:
Bootstrapping Risk: If you used a rollover as a way to finance your startup (the "rollover as business startup" or ROBS strategy), or if you made early withdrawals from your IRA/401(k) to inject cash into the business, you likely need Form 5329.
Compliance: The form covers penalties for various retirement and savings accounts, including IRAs, 401(k)s, HSAs, and Coverdell ESAs. Failure to file can lead to significant penalties.
Who Must File Form 5329?
You must file Form 5329 if any of the following situations apply to you for the 2024 tax year:
You received a taxable early distribution from a qualified retirement plan (including an IRA or modified endowment contract) before reaching age $59\frac{1}{2}$ and you qualify for an exception that is not noted on your Form 1099-R (Box 7).
Note: If your Form 1099-R correctly shows a code '1' in box 7 and you owe the additional 10% tax on the full amount, you might be able to report the tax directly on Schedule 2 (Form 1040), line 8, without filing Form 5329.
You received taxable distributions from a Coverdell ESA, QTP, or ABLE account.
Your contributions exceeded the maximum allowable limits for 2024 to your traditional IRAs, Roth IRAs, Coverdell ESAs, Archer MSAs, HSAs, or ABLE accounts, or you had excess contributions from the prior year (2023).
You didn't receive the minimum required distribution (RMD) from your qualified retirement plan (including an IRA).
Tip: If you rolled over part or all of a distribution from a qualified retirement plan, the rolled-over part is generally not subject to the 10% additional tax on early distributions. However, you still need to correctly report the rollover on your main tax return.
When and Where To File
Filing with Your Tax Return: File Form 5329 with your 2024 Form 1040, 1040-SR, 1040-NR, or 1041 by the due date (including extensions) of your tax return.
Filing By Itself: If you don't have to file a 2024 income tax return, you must complete and file Form 5329 by itself at the time and place you would be required to file Form 1040 (or 1040-SR/1040-NR).
Action for Standalone Filing: If filing by itself, you cannot file electronically.Be sure to include your address on page 1 and your signature and date on page 2. Enclose a check or money order payable to "United States Treasury" for any taxes due.
Breaking Down Form 5329 Parts That Matter Most
Form 5329 is divided into nine parts, each dealing with a specific type of additional tax. Founders and small business owners most often interact with the parts dealing with early distributions and excess contributions.
Part No. | Purpose | Key Considerations for Founders |
Part I | Additional Tax on Early Distributions (10% or 25%) | Early withdrawal penalties from IRAs, 401(k)s. Often impacts founders using retirement funds to bootstrap startups. [cite_start]Crucial for claiming exceptions. |
Part III | Additional Tax on Excess Contributions to Traditional IRAs (6%) | Avoid penalties by timely correcting excess IRA contributions. Common during aggressive early-stage personal savings. |
Part IV | Additional Tax on Excess Contributions to Roth IRAs (6%) | Similar to Part III, but for Roth IRAs. Requires careful monitoring of MAGI limits and contributions. |
Part VII | Additional Tax on Excess Contributions to HSAs (6%) | Avoid penalties if your business offers High Deductible Health Plans (HDHP) and you or your employer over-contributed to your HSA. |
Part IX | Additional Tax on Excess Accumulation (Missed RMDs) (25% or 10%) | Catches missed Required Minimum Distributions (RMDs). Relevant for founders over age 73 managing retirement plans. |
Step-by-Step Guide: How to Fill Out Form 5329
To fill out the form, you'll need your relevant tax documents, such as:
Form 1099-R (for distributions)
Form 8606 (for Roth IRA basis)
Form 8853 (for Archer MSAs)
Form 8889 (for HSAs)
1. Part I: Additional Tax on Early Distributions
This part is used to calculate the 10% (or 25% for SIMPLE IRAs) additional tax on distributions taken before age $59\frac{1}{2}$ and to claim an exception.
Line | Action | Source/Calculation |
Line 1 | Enter the early distributions includible in income you received. | This is generally found in Box 2a of your Form 1099-R. For Roth IRAs, use line 25c of Form 8606 (plus any recapture amount). |
Line 2 | Enter the portion of Line 1 that is not subject to the additional tax (the exception amount). | This is the amount you are claiming an exception for. For example, the amount used for qualified higher education expenses or up to $10,000 for a first-time home purchase. |
Line 3 | Amount subject to additional tax. | Subtract Line 2 from Line 1. |
Line 4 | Additional tax due. | Multiply Line 3 by 10% (0.10). (Use 25% if any part was from a SIMPLE IRA within 2 years of participation). |
Critical Step: In the space provided on line 2, you must enter the appropriate exception number from the instructions (e.g., '09' for first-time homebuyer, '03' for disability). If more than one exception applies, enter '99'.
How to Claim Penalty Exceptions (Line 2)
Claiming an exception prevents the 10% penalty on that portion of the early withdrawal. Here are the most common exceptions applicable to founders:
Exception No. | Description | Key Details |
03 | Distributions due to total and permanent disability. | Requires proof that you cannot engage in any substantial gainful activity due to a physical or mental condition. |
05 | Distributions for unreimbursed medical expenses. | The amount must exceed 7.5% of your Adjusted Gross Income (AGI). |
08 | IRA distributions for qualified higher education expenses. | Applies to the IRA owner, spouse, child, or grandchild. |
09 | IRA distributions for a first-time home purchase. | Limited to \$10,000 over the owner's lifetime. |
17 | Qualified birth or adoption distributions. | Limited to \$5,000 for the 1-year period after birth or adoption. Must attach a statement with the child's name, age, and TIN. |
2. Parts III, IV, VI, VII: Dealing with Excess Contributions (6% Tax)
Parts III, IV, VI, and VII cover excess contributions to Traditional IRAs, Roth IRAs, Archer MSAs, and HSAs, respectively. The additional tax is 6% of the smaller of the total excess contributions or the account's value at the end of the year.
The Goal: The primary way to avoid the 6% tax is to withdraw the excess contribution (plus any earnings) by the due date of your tax return (including extensions).
If you successfully withdrew the excess contributions (plus earnings) by the due date: You do not report the withdrawn contribution amount as an excess contribution on this form.
[cite_start]If you have prior-year excess contributions that haven't been removed, you must follow the line-by-line calculations to determine the 2024 tax on the remaining prior-year amount.
3. Part IX: Additional Tax on Excess Accumulation (Missed RMDs)
This part is used if you failed to take your Minimum Required Distribution (RMD) from your qualified retirement plan (including an IRA).
Standard Penalty Rate: Generally, the additional tax is 25% of the excess accumulation (the amount you should have withdrawn minus the amount you did withdraw).
Reduced Tax Rate: The tax is reduced to 10% of the excess accumulation if you:
Receive a distribution of the shortfall amount during the "correction window."
Submit a tax return reflecting the additional tax.
Common Mistakes and How to Avoid Them
Common Founder Mistake | Why it Happens | Solution |
Ignoring the Recapture Rule | Early distributions from a Roth IRA or Designated Roth Account can trigger a penalty on the taxable portion of prior conversions/rollovers, even if the Roth distribution is otherwise qualified. | Use the ordering rules in Pub. 590-B to calculate the exact recapture amount to report on Part I, Line 1. |
Missing the Correction Window | Failing to withdraw an excess IRA/HSA contribution by the tax return's due date (including extensions) locks in the 6% penalty for that year. | Track contributions annually. If you over-contributed, remove the excess contribution plus earnings before the tax deadline to avoid the penalty. |
Failing to Claim an Exception | Taking an early distribution for a qualified expense (like a first-time home purchase or medical bills) but not filing Form 5329 to claim the exception. | Even if you paid the distribution tax, always file Form 5329 and include the relevant exception number (e.g., '05' for medical) on Part I, Line 2 to legally avoid the penalty. |
Strategic Filing to Minimize Penalties
Plan distributions with foresight: Don’t tap into retirement accounts without tax planning—unexpected penalties can eat into vital cash flow.
Track contributions annually: Excess IRA contributions are easily made during intense growth phases—monitor limits closely.
Collaborate with accounting proactively: Ensure founder withdrawals, employee benefit plans, and personal contributions are accurately tracked.
Update benefit plans regularly: Ensure plan compliance with IRS limits and maintain eligibility for tax-favored status.
Leverage exceptions boldly—but carefully: Use qualified expenses (e.g., education or medical costs) to legally sidestep penalties when needed.
Why Partner with Haven for Your Tax Filing and R&D Credit Needs
At Haven, we understand that founders need clarity, speed, and complete compliance. Our startup-first tax and finance team delivers:
Simple and thorough guidance on forms like Form 5329
Seamless bookkeeping and tax filing tailored for growing businesses
Founder-centric advice that saves time and reduces year-end stress
R&D tax credit support that aligns with your innovation cycle
For official guidance on penalties and exceptions regarding early distributions and contribution limits, visit the IRS’s resource on retirement-related tax topics.
FAQs
What if I don't have to file a regular tax return (Form 1040)?
If you only owe the additional tax and don't need to file a 2024 income tax return, you must file Form 5329 by itself by the due date for your tax return. When filing alone, you must include your address, sign and date the form, and enclose payment for the tax due.
What is the penalty for missed RMDs (Excess Accumulation)?
The penalty for failing to take your minimum required distribution (RMD) is generally a 25% additional tax on the amount not withdrawn (the excess accumulation). This penalty can be reduced to 10% if you take the corrective distribution during the correction window.
Can I withdraw an excess contribution to avoid the 6% tax?
Yes. You can avoid the 6% additional tax on 2024 excess contributions to your IRA, HSA, or Archer MSA if you withdraw the excess contributions plus any earnings attributable to them by the due date (including extensions) of your 2024 tax return. You must also report the earnings on your return and potentially on Part I, Line 1, if you're under age.
Navigating Form 5329 can feel like a maze, especially for startup founders and operators who juggle multiple priorities.
This guide breaks down what Form 5329 covers, common scenarios when you might need it, how to claim exceptions to avoid costly penalties, and best practices for filing. With practical examples and pointers tailored to founders and business leaders, you’ll walk away ready to make informed decisions or effectively delegate this task.
What Is Form 5329 and Why Founders Should Care
Form 5329, officially titled "Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts," is used to report and pay additional taxes related to retirement accounts and other tax-advantaged savings.
While it might sound like something only individual taxpayers worry about, it can have meaningful implications for founders and teams managing company benefits, owner retirement savings, and personal financial strategies that intersect with business tax planning.
Founders should care because:
Bootstrapping Risk: If you used a rollover as a way to finance your startup (the "rollover as business startup" or ROBS strategy), or if you made early withdrawals from your IRA/401(k) to inject cash into the business, you likely need Form 5329.
Compliance: The form covers penalties for various retirement and savings accounts, including IRAs, 401(k)s, HSAs, and Coverdell ESAs. Failure to file can lead to significant penalties.
Who Must File Form 5329?
You must file Form 5329 if any of the following situations apply to you for the 2024 tax year:
You received a taxable early distribution from a qualified retirement plan (including an IRA or modified endowment contract) before reaching age $59\frac{1}{2}$ and you qualify for an exception that is not noted on your Form 1099-R (Box 7).
Note: If your Form 1099-R correctly shows a code '1' in box 7 and you owe the additional 10% tax on the full amount, you might be able to report the tax directly on Schedule 2 (Form 1040), line 8, without filing Form 5329.
You received taxable distributions from a Coverdell ESA, QTP, or ABLE account.
Your contributions exceeded the maximum allowable limits for 2024 to your traditional IRAs, Roth IRAs, Coverdell ESAs, Archer MSAs, HSAs, or ABLE accounts, or you had excess contributions from the prior year (2023).
You didn't receive the minimum required distribution (RMD) from your qualified retirement plan (including an IRA).
Tip: If you rolled over part or all of a distribution from a qualified retirement plan, the rolled-over part is generally not subject to the 10% additional tax on early distributions. However, you still need to correctly report the rollover on your main tax return.
When and Where To File
Filing with Your Tax Return: File Form 5329 with your 2024 Form 1040, 1040-SR, 1040-NR, or 1041 by the due date (including extensions) of your tax return.
Filing By Itself: If you don't have to file a 2024 income tax return, you must complete and file Form 5329 by itself at the time and place you would be required to file Form 1040 (or 1040-SR/1040-NR).
Action for Standalone Filing: If filing by itself, you cannot file electronically.Be sure to include your address on page 1 and your signature and date on page 2. Enclose a check or money order payable to "United States Treasury" for any taxes due.
Breaking Down Form 5329 Parts That Matter Most
Form 5329 is divided into nine parts, each dealing with a specific type of additional tax. Founders and small business owners most often interact with the parts dealing with early distributions and excess contributions.
Part No. | Purpose | Key Considerations for Founders |
Part I | Additional Tax on Early Distributions (10% or 25%) | Early withdrawal penalties from IRAs, 401(k)s. Often impacts founders using retirement funds to bootstrap startups. [cite_start]Crucial for claiming exceptions. |
Part III | Additional Tax on Excess Contributions to Traditional IRAs (6%) | Avoid penalties by timely correcting excess IRA contributions. Common during aggressive early-stage personal savings. |
Part IV | Additional Tax on Excess Contributions to Roth IRAs (6%) | Similar to Part III, but for Roth IRAs. Requires careful monitoring of MAGI limits and contributions. |
Part VII | Additional Tax on Excess Contributions to HSAs (6%) | Avoid penalties if your business offers High Deductible Health Plans (HDHP) and you or your employer over-contributed to your HSA. |
Part IX | Additional Tax on Excess Accumulation (Missed RMDs) (25% or 10%) | Catches missed Required Minimum Distributions (RMDs). Relevant for founders over age 73 managing retirement plans. |
Step-by-Step Guide: How to Fill Out Form 5329
To fill out the form, you'll need your relevant tax documents, such as:
Form 1099-R (for distributions)
Form 8606 (for Roth IRA basis)
Form 8853 (for Archer MSAs)
Form 8889 (for HSAs)
1. Part I: Additional Tax on Early Distributions
This part is used to calculate the 10% (or 25% for SIMPLE IRAs) additional tax on distributions taken before age $59\frac{1}{2}$ and to claim an exception.
Line | Action | Source/Calculation |
Line 1 | Enter the early distributions includible in income you received. | This is generally found in Box 2a of your Form 1099-R. For Roth IRAs, use line 25c of Form 8606 (plus any recapture amount). |
Line 2 | Enter the portion of Line 1 that is not subject to the additional tax (the exception amount). | This is the amount you are claiming an exception for. For example, the amount used for qualified higher education expenses or up to $10,000 for a first-time home purchase. |
Line 3 | Amount subject to additional tax. | Subtract Line 2 from Line 1. |
Line 4 | Additional tax due. | Multiply Line 3 by 10% (0.10). (Use 25% if any part was from a SIMPLE IRA within 2 years of participation). |
Critical Step: In the space provided on line 2, you must enter the appropriate exception number from the instructions (e.g., '09' for first-time homebuyer, '03' for disability). If more than one exception applies, enter '99'.
How to Claim Penalty Exceptions (Line 2)
Claiming an exception prevents the 10% penalty on that portion of the early withdrawal. Here are the most common exceptions applicable to founders:
Exception No. | Description | Key Details |
03 | Distributions due to total and permanent disability. | Requires proof that you cannot engage in any substantial gainful activity due to a physical or mental condition. |
05 | Distributions for unreimbursed medical expenses. | The amount must exceed 7.5% of your Adjusted Gross Income (AGI). |
08 | IRA distributions for qualified higher education expenses. | Applies to the IRA owner, spouse, child, or grandchild. |
09 | IRA distributions for a first-time home purchase. | Limited to \$10,000 over the owner's lifetime. |
17 | Qualified birth or adoption distributions. | Limited to \$5,000 for the 1-year period after birth or adoption. Must attach a statement with the child's name, age, and TIN. |
2. Parts III, IV, VI, VII: Dealing with Excess Contributions (6% Tax)
Parts III, IV, VI, and VII cover excess contributions to Traditional IRAs, Roth IRAs, Archer MSAs, and HSAs, respectively. The additional tax is 6% of the smaller of the total excess contributions or the account's value at the end of the year.
The Goal: The primary way to avoid the 6% tax is to withdraw the excess contribution (plus any earnings) by the due date of your tax return (including extensions).
If you successfully withdrew the excess contributions (plus earnings) by the due date: You do not report the withdrawn contribution amount as an excess contribution on this form.
[cite_start]If you have prior-year excess contributions that haven't been removed, you must follow the line-by-line calculations to determine the 2024 tax on the remaining prior-year amount.
3. Part IX: Additional Tax on Excess Accumulation (Missed RMDs)
This part is used if you failed to take your Minimum Required Distribution (RMD) from your qualified retirement plan (including an IRA).
Standard Penalty Rate: Generally, the additional tax is 25% of the excess accumulation (the amount you should have withdrawn minus the amount you did withdraw).
Reduced Tax Rate: The tax is reduced to 10% of the excess accumulation if you:
Receive a distribution of the shortfall amount during the "correction window."
Submit a tax return reflecting the additional tax.
Common Mistakes and How to Avoid Them
Common Founder Mistake | Why it Happens | Solution |
Ignoring the Recapture Rule | Early distributions from a Roth IRA or Designated Roth Account can trigger a penalty on the taxable portion of prior conversions/rollovers, even if the Roth distribution is otherwise qualified. | Use the ordering rules in Pub. 590-B to calculate the exact recapture amount to report on Part I, Line 1. |
Missing the Correction Window | Failing to withdraw an excess IRA/HSA contribution by the tax return's due date (including extensions) locks in the 6% penalty for that year. | Track contributions annually. If you over-contributed, remove the excess contribution plus earnings before the tax deadline to avoid the penalty. |
Failing to Claim an Exception | Taking an early distribution for a qualified expense (like a first-time home purchase or medical bills) but not filing Form 5329 to claim the exception. | Even if you paid the distribution tax, always file Form 5329 and include the relevant exception number (e.g., '05' for medical) on Part I, Line 2 to legally avoid the penalty. |
Strategic Filing to Minimize Penalties
Plan distributions with foresight: Don’t tap into retirement accounts without tax planning—unexpected penalties can eat into vital cash flow.
Track contributions annually: Excess IRA contributions are easily made during intense growth phases—monitor limits closely.
Collaborate with accounting proactively: Ensure founder withdrawals, employee benefit plans, and personal contributions are accurately tracked.
Update benefit plans regularly: Ensure plan compliance with IRS limits and maintain eligibility for tax-favored status.
Leverage exceptions boldly—but carefully: Use qualified expenses (e.g., education or medical costs) to legally sidestep penalties when needed.
Why Partner with Haven for Your Tax Filing and R&D Credit Needs
At Haven, we understand that founders need clarity, speed, and complete compliance. Our startup-first tax and finance team delivers:
Simple and thorough guidance on forms like Form 5329
Seamless bookkeeping and tax filing tailored for growing businesses
Founder-centric advice that saves time and reduces year-end stress
R&D tax credit support that aligns with your innovation cycle
For official guidance on penalties and exceptions regarding early distributions and contribution limits, visit the IRS’s resource on retirement-related tax topics.
FAQs
What if I don't have to file a regular tax return (Form 1040)?
If you only owe the additional tax and don't need to file a 2024 income tax return, you must file Form 5329 by itself by the due date for your tax return. When filing alone, you must include your address, sign and date the form, and enclose payment for the tax due.
What is the penalty for missed RMDs (Excess Accumulation)?
The penalty for failing to take your minimum required distribution (RMD) is generally a 25% additional tax on the amount not withdrawn (the excess accumulation). This penalty can be reduced to 10% if you take the corrective distribution during the correction window.
Can I withdraw an excess contribution to avoid the 6% tax?
Yes. You can avoid the 6% additional tax on 2024 excess contributions to your IRA, HSA, or Archer MSA if you withdraw the excess contributions plus any earnings attributable to them by the due date (including extensions) of your 2024 tax return. You must also report the earnings on your return and potentially on Part I, Line 1, if you're under age.
This article was co-written by:
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This article was co-written by: