10-Year Averaging For Select Lump Sums
There is a special 10-year averaging computation for plan participants born before January 2, 1936. Generally, the only plans that qualify for the lump sum averaging are Keogh, 401(k), and 403(a). SEPs, IRAs, 403(b) and Nonqualified Deferred Comp plans are not allowed to use the lump sum averaging rules. For a large portion of the planning cases, the need to take a sizeable lump-sum distribution up front occurs very rarely.
Must include “all such amounts received during tax year.” The Tax Court stated that an election to use 10year averaging for a lump-sum distribution is available only if all lump-sum distributions received in a given year are included in the election (O. Fowler, 98 TC, No. 34).
Taxability options, regardless of the taxpayer’s age:
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Rollover:, The taxable part of the distribution can be rolled over in whole or in part to an IRA (or other qualified plan)., The part rolled over will not be currently taxed; the part not rolled over will be taxed as ordinary income.
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Ordinary income: The whole distribution (taxable part) can be included as ordinary income on Form 1040, line 5(b) (2021), and taxed along with other income at regular rates.