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.
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.
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.
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?