I called them this morning, and they told me I need to fill out a 5329 form to get the $1,923 “penalty” waived. I’m still confused about why the 10% I initially withheld counts as a penalty.
They also mentioned I’d need to request in writing for the $778 actual penalty to be potentially waived, though they couldn’t guarantee it for cases like mine.
Form 5329 is for exceptions to the extra 10% early distribution tax if you’re under 59 1/2 and took money out of a retirement account.
What type of account was it? And why did you take the money early? IRA? 401k?
It looks like your plan was to have 10% withheld, but that’s only a start. The distribution is still subject to regular income tax, which 10% withholding doesn’t fully cover.
This chart might help explain it: Retirement topics - Exceptions to tax on early distributions | Internal Revenue Service. Depending on the account type and reason, you might or might not qualify.
If you don’t qualify for an exception, skip the 5329 form. You’d owe both regular tax and the 10% penalty, so the notice would be correct.
The $778 penalty on your CP2000 won’t qualify for a first-time waiver, and you’d need a written explanation. This penalty comes from underreporting income, so it applies here because the IRS says you missed reporting income.
Ash said:
@True
It was a 401k I cashed out to cover moving costs, deposits, and other expenses.
Unfortunately, that reason doesn’t qualify. If you’re under 59 1/2, you’ll owe the extra 10%.
You can still try writing a letter to request a waiver on the understatement penalty, but you’ll need a solid reason beyond just forgetting to report it.
Here’s the IRS info on penalty relief: Penalty relief for reasonable cause | Internal Revenue Service.
If you write in for penalty relief, it may delay your case while they review your letter.
The 10% fee is a penalty for taking the money out early. It’s separate from the underreporting penalty. Many people think the 10% withholding covers the tax on the withdrawal, but that’s just a part of what’s owed. Exceptions exist, but if those don’t apply, the fee generally can’t be waived.
More info on exceptions here: Retirement topics - Exceptions to tax on early distributions | Internal Revenue Service.
Ash said:
@Oli
So do I even need to fill out Form 5329, or should I just pay what they’re asking?
No, you don’t need the form if you don’t qualify for any exceptions.
Ash said:
@Oli
So do I even need to fill out Form 5329, or should I just pay what they’re asking?
No, you don’t need the form if you don’t qualify for any exceptions.
Got it. Can I at least try to get the $778 penalty waived?
Ash said:
@Oli
So do I even need to fill out Form 5329, or should I just pay what they’re asking?
[deleted]
Ash said:
@Oli
So do I even need to fill out Form 5329, or should I just pay what they’re asking?
[deleted]
Nope. Form 5329 is only for the 10% penalty for early distribution. Since the person here took out a 401k distribution and used it for moving and other expenses, it doesn’t count.
Form 5329 helps if you want to avoid the 10% early withdrawal penalty for qualified reasons. You still owe tax on the amount taken out.
Since you used the money for moving, that doesn’t qualify on its own. Here are a few questions:
Did you buy a first home? Pay for medical bills or health insurance while unemployed? Cover tuition for yourself or a dependent?
We don’t promote tax fraud here. Please don’t make posts or comments like this again. Thanks.
We don’t promote tax fraud here. Please don’t make posts or comments like this again. Thanks.
