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February 23, 2009

Forward Averaging

Your Guide

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Definition

Also referred to as Income Averaging

Tax treatment where lump-sum distributions from qualified plans are treated as if they were distributed averagely over a five-year or ten-year period, beginning with the year the distribution occurs.

However, the distributions are in fact distributed in one year and applicable taxes are paid on the amount for the year the distribution occurs.

Forward averaging is used to reduce the amount of taxes paid on the distribution amount, by lowering the participant’s tax rate.

The five-year income averaging was repealed under the Small Business Job Protection Act of 1996 ( SBA ’96) effective for distributions that occur after 12/31/1999

Referring Cite

IRC § 402(d), IRS Form 4972

Additional Helpful Information

  • A taxpayer must file IRS Form 4972 in order to elect the income averaging tax treatment
  • In order to be eligible for the ten-year income averaging, the participant must have  attained age 50 prior to January 1, 1986
  • A lump–sum distribution is defined as the  distribution or payment, within a single tax year, of a plan participant’s entire balance from all of the employer’s qualified pension, profit-sharing, or stock bonus plans. All the participants accounts under the employer’s qualified pension, profit-sharing, or stock bonus plans must be distributed in order to be a lump-sum distribution.
  • A participant   can use Form 4972 only once

Written By

Denise Appleby

Denise is CEO of Appleby Retirement Consulting Inc., a firm that provides IRA resources for financial/ tax/legal professionals. She has over 20 years of experience in the retirement plans field, which includes training and technical consultation.

Denise writes and publishes educational /marketing tools for advisors; available at http://irapublications.com. Denise co-authored several books on IRAs

Denise is a graduate of The John Marshall Law School, where she obtained a Masters of Jurisprudence in Employee Benefits, and has earned 5 professional retirement designations.
She has appeared on numerous media programs, sharing her insights on retirement tax laws.

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