What this line means
Line 1 minus line 2 — the portion of your early distributions that does not qualify for any exception. This is the amount on which the 10% additional tax penalty is calculated. If all your early distributions qualify for exceptions, this line is zero and you owe no penalty.
Does this apply to you?
- You took early distributions and only part of the amount qualifies for an exception
- You have no qualifying exception and the full early distribution is subject to the penalty
- You need to calculate the base amount for the 10% additional tax on line 4
Easy to overlook
Partial exceptions are common You can have $30,000 in early distributions where $10,000 qualifies for the first-time homebuyer exception and $20,000 does not qualify for any exception. Line 2 is $10,000, and line 3 is $20,000. The 10% penalty applies only to the $20,000. Filers sometimes assume it is all-or-nothing — either the entire distribution is exempt or none of it is. 1 IRS Form 5329 instructions — Line 3
Distributions used for qualified higher education expenses are penalty-free from IRAs Early IRA distributions used to pay qualified education expenses (tuition, fees, books, supplies) for you, your spouse, or dependents are exempt from the 10% penalty. This exception applies only to IRAs, not to 401(k) or 403(b) plans. Filers who paid college expenses with IRA withdrawals often miss this exception and overpay on line 3. 2 IRS Publication 590-B — Distributions from IRAs
Watch out for this
Entering the full distribution amount on line 3 without first checking all available exceptions on line 2. The IRS provides over a dozen exception codes. Review every code before concluding that no exception applies. A $10,000 distribution with a valid exception means zero on line 3 and no penalty. Skipping line 2 costs you 10% unnecessarily.
Footnotes
-
IRS Form 5329 Instructions, Line 3. https://www.irs.gov/instructions/i5329 ↩
-
IRS Publication 590-B, Distributions from Individual Retirement Arrangements, Exceptions. https://www.irs.gov/pub/irs-pdf/p590b.pdf ↩