Ten Year Pension Distribution Averaging Tax

The Ten Year Pension

Distribution Averaging Tax

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Taxpayers who were born before 1986 may be eligible for a little known tax break when receiving a distribution from an employer pension or profit sharing plan. The pension recipient has three basic choices with respect to the distribution.

1. Treat the entire distribution as ordinary income in the year it is received.

2. Elect and use the ten year averaging method. Up to 50% of the total distribution may be tax free and the balance will be subject to very low tax rates.

3. Elect to pay a flat 20% tax on any part of the distribution that was accumulated before 1974 and then choose options 1. or 2. above for the balance of the distribution.

For many taxpayers, the best choice is to elect the ten year averaging tax using IRS Form 4972. Here is how it is done, although it may be best to have a tax professional work out the numbers using a professional quality tax preparation program.

fifty percent of distributions under $20,000 may be exempt from tax

the exempt portion is phased out on distributions from $20,000 to $70,000

Compute tax on 1/10th of taxable pension distribution at 1986 single taxpayer rates (See Form 4972, Page 4)

only the cost of employer securities is part of the lump sum amount

unrealized gain on employer securities is deferred until the securities are sold

Qualifications for the ten year averaging tax

1. received your distribution after you were age 59.5
2. have not made a rollover to an IRA of any part of the plan distribution from the same employer
3. have been a participant in the plan for at least five years
4. received the distribution in one tax year.
5. were born before 1936

For lump sum distributions of less than $70,000, this election may result in substantial tax savings. However, this is only a very brief and non-technical description of this election and a careful study of the instructions to Form 4972 is required to determine whether a specific taxpayer is eligible to use this election.

Note: In some cases, a beneficiary of a taxpayer who is eligible for this election may also be eligible to use the election.

Vernon Jacobs is the Editor/Publisher of The International Wealth Protection Reports, which are a collection of research reports on legal methods of asset protection and tax avoidance. Further information on this subject is available at http://www.offshorepress.com/ Jacobs is a CPA who has worked as a free lance tax and financial author/editor since 1977. Details about his credentials and experience are online at http://www.offshorepress.com/vkjcpa/

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