After years of careful tax planning and saving for retirement, how would you feel if you lost thousands of dollars simply because you didn’t know about 5 simple facts? In all likelihood you’d feel pretty terrible. Let’s get a jump on this terrible mistake and learn about these little-known facts about your Individual Retirement Account and other tax-favored accounts, all of which can be found in the instructions to IRS Form 5329, also known as form 5329-t.
1. Taking An Early Distribution Will Cost You
Did you know that your IRA has rules, one of which is that you’re not supposed to take a distribution until you’re at least age 59 1/2? You can take distributions whenever you want but you’ll pay for it. You’ll pay income tax on that amount, plus an additional tax of 10%! Now, doesn’t that defeat the whole purpose of a tax-favored account like an IRA? If you remember back to the days when you first set up your IRA, you’ll remember that the advantages were tax savings. Taking an early distribution wipes all that away and leaves you with no tax benefit at all…plus a 10% interest “fee”.
2. Contributing Too Much to your Traditional IRA Will Cost You
There is also an Additional Tax on contributions you make to your Traditional IRA over the annual limit. Right now that limit is $5,500 per year. You would use Form 5329 to report additional tax on the amount over the limit.
3. Using Money from an Education Account for Something Other Than Eduction Will Cost You
Same here: use IRS Form 5329-t (really the name for this form is IRS Form 5329 with no “t”) to report the penalty tax you must pay on money incorrectly spent form an education savings account. That would mean you took money from your tax-favored educations savings account to pay for rent, bills, anything other than qualified education costs. This includes Coverdell Education Savings Accounts.
4. Excess Contributions to Health Savings Accounts Will Cost You
Yes, this is another tax-favored account rule that, if broken, will cost you money in the end. Just like the IRAs, HSAs also have a contribution limit. Go over the limit, better get yourself a copy of Form 5329 and pay additional tax.
5. If You Don’t Take the Mandatory Distributions From Your Retirement Plan, You’ll Pay Extra Tax
Another fine: after you reach the age of 70 1/2 you must start taking distributions from your Qualified Retirement Plan. If not, then you will have to use IRS Form 5329 to report this and pay additional tax.
I hope you’re seeing a pattern here…don’t break the rules of tax-favored accounts or you’ll lose all the benefit from creating them in the first place.