Form 5329 (2026): Early-Withdrawal and Excess-Contribution Penalties + AI Agent Skill

Form 5329 is the IRS form that reports, and often erases, the three big retirement-account penalties: the 10% additional tax on distributions taken before age 59½, the 6% annual excise on excess contributions to IRAs and HSAs, and the 25% excise on a missed required minimum distribution (cut to 10% if you fix it within the correction window). You attach it to your Form 1040; the 2025 revision is the one filed with returns in 2026. For the self-employed, it is also where solo 401(k), SEP-IRA, and HSA mistakes get cleaned up.

Key numbers on Form 5329 (2025 form, filed in 2026):

Save this cheat sheet — every 5329 penalty rate in one image.

What Form 5329 Covers

Form 5329, "Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts," collects every excise tax the tax code attaches to retirement and savings accounts, spread across nine parts:

For a self-employed reader, three of those parts do all the work: Part I when you raid a solo 401(k) or SEP-IRA early, Parts III and VII when uneven income causes an overcontribution, and Part IX once RMDs begin at age 73. The results flow to Schedule 2 (Form 1040), line 8. Note the form's own scope line: traditional IRAs on this form include traditional SEP-IRAs and SIMPLE IRAs, so a SEP overcontribution by a sole proprietor lands in Part III like any IRA excess.

The 10% Early-Distribution Tax (Part I)

Take a taxable distribution from a retirement account before age 59½ and IRC §72(t) adds 10% on top of the ordinary income tax, unless an exception applies. Part I is four lines: total early distributions on line 1, the portion covered by an exception on line 2 (with a 2-digit code), the difference on line 3, and 10% of that on line 4. One caution printed on the form itself: a distribution from a SIMPLE IRA within the first 2 years of participation is taxed at 25%, not 10%.

Worked example. Saoirse, 45, a freelance engineer, pulls $20,000 from her solo 401(k) in 2025 to cover a slow quarter. No exception applies. She owes ordinary income tax on the $20,000 plus a $2,000 additional tax from Form 5329, Part I. In her 24% bracket the total federal hit is $6,800, about a third of the withdrawal. Had she qualified for one exception below, line 2 would have wiped out some or all of the $2,000.

The Exception Codes, 01 Through 23

Enter the matching code on line 2 to exempt a distribution (2025 Instructions for Form 5329). SECURE 2.0 added codes 20–23, which many older guides still miss:

Details that decide real cases, from IRS Notice 2024-55: the code 23 emergency distribution is limited to one per calendar year, and you cannot take another in the following 3 years unless you repay the first or contribute at least as much back. Code 22 can be self-certified to the plan, and both 22 and 23 amounts can be repaid within 3 years to recover the income tax.

The Exceptions Self-Employed Filers Get Wrong

The age-55 rule (code 01) does not apply to IRAs, including SEP and SIMPLE IRAs. It covers qualified employer plans, like a solo 401(k), and only if you separated from service in or after the year you turned 55. Roll that solo 401(k) into an IRA first and the exception is gone; distributions then wait for 59½. The medical exception (05) needs expenses above 7.5% of AGI in the distribution year, a bar most healthy filers never clear. And higher education (08) works for IRAs only, not 401(k)s. The safest reading: match your account type to the code list before assuming an exception saves you.

Excess Contributions: The 6% Loop (Parts III, IV, VII)

Contribute more than your limit and IRC §4973 charges 6% of the excess every year it stays in the account, capped at 6% of the account's year-end value. It is not a one-time fee. A $1,500 excess left in place for four years costs 6% four times. Self-employed savers hit this constantly because contribution room depends on net profit that isn't known until the books close: a thin year shrinks your SEP or solo 401(k) limit after the money already went in. In my conversations with self-employed business owners while building Jupid, the excess almost always traces to one habit: funding the account in spring at last year's profit level, then landing a slower year.

The 2026 contribution limits to check against:

Worked example. Wendell, a self-employed carpenter, puts $7,500 into his traditional IRA early in 2026, then finishes the year with only $6,000 of net self-employment earnings (his only compensation). His IRA limit is capped at his compensation, so $1,500 is excess. Left uncorrected, Form 5329 Part III charges 6% × $1,500 = $90 for 2026, another $90 for 2027, and so on until it is fixed.

How to Cure an Excess Contribution

Three exits, in order of preference:

1. Withdraw by the filing deadline. Remove the excess plus its earnings before the due date of your return, including extensions, and the contribution is treated as never made. The earnings are taxable in the year contributed, and if you're under 59½ the 10% tax can apply to the earnings alone (that's what exception code 21 handles for pre-deadline corrective distributions). No 6% excise at all.
2. The six-month grace window. Filed on time without fixing it? You can still withdraw the excess and earnings up to six months after the unextended due date, then amend with "Filed pursuant to section 301.9100-2" written on top.
3. Absorb it next year. Leave the money in, pay the 6% for one year, and count the excess against next year's contribution limit (that's the mechanic on line 10 of Part III). This is often cheapest when the market dropped and withdrawing would lock in a loss, or when the earnings calculation is large.

HSA excesses (Part VII, lines 42–49) cure the same way: withdraw the excess and earnings by the deadline, or carry it against next year's limit and pay 6% once. The interaction with your deduction runs through Form 8889, and the contribution totals the IRS checks against come from Form 5498-SA, which your custodian files.

Sizing next year's contributions correctly is the real prevention. Our guide to retirement plan deductions for the self-employed covers the solo 401(k) vs SEP math, and the 401(k) calculator projects what a given deferral does to your balance and your tax bill.

Missed RMDs: 25%, Then 10%, Often 0% (Part IX)

Miss a required minimum distribution after age 73 and IRC §4974 imposes an excise of 25% of the shortfall. SECURE 2.0 softened this twice. First, the penalty drops to 10% if you withdraw the missed amount and file within the correction window, which ends on the earliest of: the date the IRS mails a deficiency notice, the date the tax is assessed, or the last day of the second tax year after the year the tax arose. Second, the IRS routinely waives the penalty entirely for reasonable cause.

The waiver procedure, straight from the instructions: report the shortfall in Part IX, write "RC" and the amount you want waived in parentheses on the dotted line next to line 54a or 54b, subtract it, and attach a statement explaining the reasonable error (illness, custodian mistake, bad advice) and what you did to fix it. You pay only the tax on any unwaived portion when filing; the IRS responds if it disagrees.

Worked example. Anders, 74, retired from consulting, was required to take $8,000 from her traditional IRA in 2025 but her custodian's automatic distribution failed. Uncorrected, the excise is $2,000. She withdraws the $8,000 in February 2026, inside the correction window, cutting it to $800 (line 54a: $8,000 × 10%). Because the failure was the custodian's documented error, she instead files with "RC ($8,000)" beside line 54a, enters zero tax, and attaches the explanation. Waivers on these facts are commonly granted.

When You Do NOT Need Form 5329

The form's own header says it: if you only owe the flat 10% on the full amount of your early distributions, you can skip Form 5329 and enter the tax directly on Schedule 2 (Form 1040), line 8. Whether you file depends on Box 7 of the Form 1099-R your custodian sends:

• Code 1 (early, no known exception) and you agree: no Form 5329 needed; report the 10% straight on Schedule 2
• Code 2, 3, or 4 (exception applies, disability, death): the exception is already coded; no Part I filing needed for that distribution
• Code 1 but you qualify for an exception: file Form 5329 to claim it with exception code 12 or the specific code; this is the form's whole purpose
• Age 59½ or older at distribution: no early-distribution tax, no Part I
• Qualified Roth IRA distributions and proper rollovers: not taxable, nothing to report here
• No excess contributions and no missed RMDs: Parts III–IX stay empty; no form

One more negation worth naming: Form 5329 does not calculate the income tax on a distribution. That happens on your 1040 regardless. The form only handles the additional taxes stacked on top.

File Form 5329 With an AI Agent Skill

Our open-source skill library at github.com/jupid-tax/jupid-skills includes a dedicated forms/form-5329 skill that walks an AI agent through the form the way this article does: it reads your 1099-R codes to decide whether you need to file at all, matches your situation against the full exception-code table (including the newer 20–23 codes), computes the 6% excess loop across years, and drafts the "RC" reasonable-cause waiver statement for a missed RMD. Load it into Claude or another agent and review the completed part-by-part output before filing.

Common Mistakes on Form 5329

Claiming the age-55 exception for an IRA withdrawal. Code 01 is for qualified plans only. A 56-year-old taking $30,000 from a SEP-IRA owes the full $3,000 unless a different code fits.

Paying the 6% once and forgetting the excess. The excise repeats every year the excess remains (Part III carries prior-year excess forward from your previous 5329, line 16 to line 9). A forgotten $3,000 excess costs $180 a year indefinitely.

Withdrawing an excess contribution without its earnings. A cure that leaves the earnings behind isn't a cure; the excess is only "treated as not contributed" if the earnings come out too and land in your gross income.

Paying the 25% RMD penalty without requesting the waiver. The RC procedure costs an attached statement and routinely reduces reasonable-cause cases to zero. Paying first and asking later is the expensive order of operations.

Filing nothing because no 1099-R arrived. Excess contributions and missed RMDs generate no 1099-R; the custodian doesn't know your limit or your other accounts. Those penalties are self-reported, and the statute of limitations doesn't start running until a Form 5329 is filed.

Catching Contribution Room Before Year-End: How Jupid Helps

Most Form 5329 penalties start as a bookkeeping blind spot: a SEP contribution sized in March against profit that didn't materialize by December. Jupid connects to your business bank account, categorizes income and expenses with 95.9% accuracy, and keeps your real-time net profit visible all year, the number your solo 401(k) and SEP limits actually depend on. Message the AI accountant in WhatsApp or iMessage, "what's my net profit so far?", before you fund the account, not after, and the 6% loop never starts. Try Jupid

Action Checklist

• Check Box 7 of every 1099-R; codes 2, 3, or 4 may mean no Form 5329 is needed
• Match any early distribution to the exception-code table (01–23) before accepting the 10%
• Compare 2026 contributions to your real limits: $24,500 solo 401(k) deferral, $7,500 IRA, $4,400/$8,750 HSA
• Withdraw any excess contribution plus earnings before your return's due date (including extensions)
• If an RMD was missed, withdraw the shortfall now to qualify for the 10% correction-window rate
• Attach the "RC" statement on line 54a/54b to request a full reasonable-cause waiver
• Carry the result to Schedule 2 (Form 1040), line 8, and keep the custodian correspondence

Sources

• Form 5329 (2025) — parts and line references used above
• Instructions for Form 5329 (2025) — exception codes, correction window, RC waiver
• IRS Notice 2024-55 — emergency personal expense and domestic abuse distributions
• IRS Publication 590-B — IRA distributions and RMD rules
• IRC §72(t) — 10% additional tax and exceptions
• IRC §4973 — 6% excess-contribution excise
• IRC §4974 — RMD excise and reasonable-cause waiver

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This guide is for general educational purposes and does not constitute tax, legal, or accounting advice. Penalty rates and exception rules reflect the 2025 Form 5329 (filed in 2026) and 2026 contribution limits; indexed amounts change annually. For advice specific to your situation, consult a qualified tax professional.