IRS Form 5329 Explained: Penalties, Exceptions, and How to File

If you have tapped into your retirement accounts early, put too much money in, or forgotten to take a required withdrawal, you will likely need to deal with IRS Form 5329.

Form 5329 is the form the IRS uses to calculate excise taxes and penalties on retirement accounts. More importantly, it is the form you use to claim a statutory exception so you don't have to pay those penalties.

Jump to your situation:

• I left my job at 55 or older
• I'm taking equal periodic payments (72(t)/SEPP)
• I used retirement funds for large medical bills
• I withdrew to buy a first home
• I had or adopted a child
• I missed a required minimum distribution (RMD)
• Show me every exception code (full list)

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The Master Table of Contents: All 5329 Exception Codes

If your 1099-R has a Code 1 in Box 7, the IRS assumes you owe the 10% penalty. To eliminate it, you must file Form 5329 and use a specific two-digit exception code on Part I, Line 2.

We have broken down the mechanics, limits, and common taxpayer pitfalls for every single exception code recognized by the IRS:

• Code 01: Separation from Service
• Code 02: Substantially Equal Periodic Payments (SEPP)
• Code 03: Total and Permanent Disability
• Code 04: Death of the Account Owner
• Code 05: Unreimbursed Medical Expenses
• Code 06: Qualified Domestic Relations Order (QDRO)
• Code 07: Alternate Payees (Lump-Sum)
• Code 08: IRS Levy
• Code 09: Qualified Reservist Distributions
• Code 10: Higher Education Expenses
• Code 11: The First-Time Homebuyer
• Code 12: Health Insurance While Unemployed
• Code 13: Corrective Distributions
• Code 14: Phased Retirement
• Code 15: Dividends from ESOPs
• Code 16: Public Safety Employees
• Code 17: Qualified Birth or Adoption
• Code 18: Terminal Illness
• Code 19: Domestic Abuse Victims
• Code 20: Emergency Personal Expenses
• Code 21: Federal Disaster Distributions

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Code 01: Separation from Service

• Who qualifies: You separated from your employer during or after the year you reached age 55.

The costly mistake here: Taxpayers mistakenly think they can use this code for IRA distributions. This exception strictly applies to qualified plans (like a 401k), not IRAs. Also, the separation must occur in or after the year you turn 55. If you quit at 54 and wait until 55 to take the money, the penalty still applies.

Code 02: Substantially Equal Periodic Payments (SEPP)

• Who qualifies: You set up a Section 72(t) schedule to take equal payments for the rest of your life expectancy.

The trap to watch out for: The "Modification Trap." The payments must continue for at least 5 years or until you turn 59½, whichever is later. If you change the payment amount, take an extra withdrawal, or even roll money into the account, it triggers a "modification." The IRS will retroactively apply the 10% penalty to all past distributions plus interest.

Code 03: Total and Permanent Disability

• Who qualifies: You become completely disabled and cannot engage in substantial gainful activity.

The costly mistake here: A temporary injury that puts you out of work for six months does not qualify. The IRS expects a physician's certification stating the condition is expected to result in death or be of long-continued, indefinite duration.

Code 04: Death of the Account Owner

• Who qualifies: You inherited a retirement account and took a distribution.

The costly mistake here: The Spousal Rollover Trap. If a surviving spouse rolls the deceased spouse's IRA into their own name, subsequent distributions are treated as their own. If the surviving spouse is under 59½, they will owe the 10% penalty. To use Code 04, the funds must stay in an Inherited IRA.

Code 05: Unreimbursed Medical Expenses

• Who qualifies: You use retirement funds to pay crushing medical debt.

Where taxpayers go wrong: The exception only applies to the portion of your unreimbursed medical expenses that exceed 7.5% of your Adjusted Gross Income (AGI). If your AGI is $100,000, the first $7,500 of medical bills do not qualify for the penalty exception.

Code 06: Qualified Domestic Relations Order (QDRO)

• Who qualifies: You receive a distribution as an alternate payee under a divorce decree QDRO.

Where people screw this up: Just like Code 01, this exception does not apply to IRAs. Divorce-related transfers of IRAs are handled differently. If a spouse receives an IRA in a divorce and cashes it out, they owe the penalty.

Code 07: Alternate Payees (Lump-Sum)

• Who qualifies: Certain lump-sum distributions to alternate payees from a series of payments.

The trap to watch out for: Assuming any court order works. The order must meet strict federal definitions of an alternate payee under non-qualified plans or specific state orders.

Code 08: IRS Levy

• Who qualifies: The IRS legally levied your retirement plan to pay back taxes.

The trap to watch out for: This only applies if the IRS forcibly takes the money. If you voluntarily withdraw money to pay a tax bill to avoid a levy, the 10% penalty still applies.

Code 09: Qualified Reservist Distributions

• Who qualifies: You are a military reservist called to active duty for at least 179 days.

The trap to watch out for: Withdrawing the funds outside the active-duty window. The distribution must occur during your active duty period.

Code 10: Higher Education Expenses

• Who qualifies: You pay for tuition, books, or fees for yourself, your spouse, your children, or grandchildren.

The costly mistake here: This exception applies only to IRAs, not to 401(k)s. Furthermore, you cannot "double-dip." If you use the expenses to claim the American Opportunity Tax Credit, you cannot use those same expenses to justify a penalty-free IRA withdrawal.

Code 11: The First-Time Homebuyer

• Who qualifies: You use up to $10,000 from an IRA to buy, build, or rebuild a first home.

The costly mistake here: Taxpayers frequently misunderstand "first-time." You only qualify if you (and your spouse) have had no ownership interest in a principal residence during the 3-year period ending on the purchase date. The funds must be spent within exactly 120 days of withdrawal, and the $10,000 limit is a lifetime cap, not per-purchase.

Code 12: Health Insurance While Unemployed

• Who qualifies: You lose your job, receive unemployment for 12 consecutive weeks, and use IRA funds to pay health premiums.

The costly mistake here: This exception applies strictly to IRAs. You cannot use this to pull money out of a 401(k) penalty-free.

Code 13: Corrective Distributions

• Who qualifies: You contributed too much to your plan and the administrator forces a corrective distribution of the excess.

Where people screw this up: Missed deadlines. If the corrective distribution is made after the applicable deadline (usually April 15 of the following year), the exemption is lost, and the earnings on the excess will be subject to the 10% penalty.

Code 14: Phased Retirement

• Who qualifies: Distributions under a federal phased retirement program.

The catch: This is a highly niche code exclusively for specific federal civil service employees. Private-sector employees cannot use it.

Code 15: Dividends from ESOPs

• Who qualifies: You receive dividends passed through an Employee Stock Ownership Plan.

The catch: Only specific dividends passed directly to participants qualify. General distributions of stock value upon leaving the company do not.

Code 16: Public Safety Employees

• Who qualifies: You are a police officer, firefighter, or EMT who separates from service in or after the year you reach age 50 (or after 25 years of service).

The costly mistake here: Private sector prohibition. This is strictly for governmental plan participants. Private security guards or paramedics working for private ambulance companies do not qualify.

Code 17: Qualified Birth or Adoption

• Who qualifies: You withdraw up to $5,000 to cover costs within one year of the birth or adoption of a child.

The catch: The IRS requires you to list the name, age, and Social Security Number (TIN) of the child directly on your tax return. If you fail to include the TIN, the exception will be denied.

Code 18: Terminal Illness

• Who qualifies: A physician certifies that you have an illness expected to result in death within 84 months.

The catch: Because this was newly added by the SECURE 2.0 Act, many employer 401(k) plans have not updated their systems to process this. Even if the employer codes the 1099-R as an early withdrawal, you must manually file Form 5329 with Code 18 to override it.

Code 19: Domestic Abuse Victims

• Who qualifies: You withdraw funds within 1 year of experiencing domestic abuse by a spouse or partner. Limit is the lesser of $10,000 (indexed for inflation) or 50% of the account value.

The costly mistake here: Relying solely on self-certification. While the law allows plan administrators to release the funds based on your self-certification, the IRS can still request documentation (police reports, medical records, or court orders) during an audit.

Code 20: Emergency Personal Expenses

• Who qualifies: You withdraw up to $1,000 for unforeseeable or immediate financial needs.

Where taxpayers go wrong: The Frequency Cap. You cannot take another Code 20 distribution for the next 3 calendar years unless the previous distribution is fully repaid, or your subsequent contributions to the plan equal the amount withdrawn.

Code 21: Federal Disaster Distributions

• Who qualifies: You live in a federally declared disaster area and withdraw up to $22,000.

Where people screw this up: Timing. The distribution must occur within a specific window, generally within 180 days after the disaster was officially declared.

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Scenario: Missed Required Minimum Distributions (RMDs)

Part IX of Form 5329 is used when you fail to take your Required Minimum Distribution (RMD). The IRS assesses a penalty on the amount you should have withdrawn.

Where people screw this up: Historically, this penalty was a draconian 50%. Under the SECURE 2.0 Act, the penalty was reduced to 25%.

Even better: if you correct the mistake quickly (during the "correction window" by taking the missed RMD and filing a return reflecting the tax), the penalty is further reduced to 10%. You calculate this on Part VIII of Form 5329. If the failure was due to a reasonable error (like a bank error or severe illness), you can use Form 5329 to formally request a waiver of the penalty entirely.

Decoding Your 1099-R: Box 7 Distribution Codes

If you received a Form 1099-R, Box 7 contains a specific code that tells the IRS exactly how to treat your distribution—and whether the 10% penalty applies automatically.

Because there are dozens of codes and scenarios, we have built a dedicated guide to decoding these codes. Read our full breakdown: Decoding Your 1099-R Box 7 Codes: When to File Form 5329.

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If you're staring at a massive penalty from a botched withdrawal or a missed deadline, do not just pay it blindly. Reach out to our team of tax strategists to review your situation. We may be able to identify an exception or file a penalty waiver on your behalf.

Book a Consultation with Plain Sailing Co.

If your early withdrawal is part of a bigger retirement-timing question, see the related guides to how a 72(t)/SEPP works, your 1099-R Box 7 codes, and our overview of Roth conversion and backdoor Roth tax planning.