One of the many benefits of saving for retirement is that the IRS gives you a tax break on the contributions. You can save a lot of money over the years this way, even though you will have to eventually pay some income tax on the withdrawals after you retire. The IRS just wants you to follow some rules…namely you “promise” not to use the retirement savings for anything but retirement. For this reason, there are rules about withdrawing the money before retirement age, which is 59 1/2. If you get a tax break from the IRS for your private retirement fund, and then spend it when you’re 43, they’re going to hit you with some additional taxes. That’s what IRS Form 5329-T is for.
IRS Form 5329-T, Additional Taxes on Qualified Plans
The full name of IRS Form 5329-T is Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts. The words “tax-favored” are the key to understanding this form: the IRS did you a favor by giving you a tax break on the money that went into this special account. You didn’t have to pay any income tax on it. Well if you break your end of the bargain and take an early distribution from the account they’ll take back their favor and make you pay income tax on what you took out. Also, you’ll be paying a penalty on top of the tax. All this is figured and reported on IRS Form 5329-T, which is found here on the IRS website.
IRS Form 5329-T is Really IRS Form 5329, Same Thing
IRS Form 5329-T covers other “rule-breaking” behavior concerning tax-favored accounts. For example, if you contribute too much money to your Health Savings Account (HSA), you will pay additional tax. Same for other tax-favored accounts that have contribution limits:
- Archer MSAs (Medical Savings Accounts)
- Traditional IRAs
- Roth IRAs
- Coverdell ESAs (Education Savings Accounts)