Tuesday, April 29, 2008

What does 10- Averaging mean to the IRS?

What is the 10 averaging for seniors?Well, it applies to those born before 1-2-1936. This relates to only one thing, Lump Sum Distributions from pension plans. According to Tax Mama, you would use Form 4972 if this applies to you. There is a good explanation at the Tax Almanac htp://www.taxalamanac.org/index.phd/LumpSumDistribution

5.3 Pensions/Annuities/Retirement Plans (i.e., 401(k), etc.): Types of Plans
I received a lump-sum distribution when I retired. Is there any special tax averaging option on a lump-sum distribution?
If you were born before January 2, 1936, or are the beneficiary of a participant born before January 2, 1936, you may be able to elect optional methods of figuring the tax on lump-sum distributions you received from a qualified retirement plan.
A lump-sum distribution is the distribution or payment, within a single tax year, of an employee's entire balance from all of the employer's qualified pension, profit-sharing, or stock bonus plans. The distribution must have been made under specific conditions. For details, refer to Tax Topic 412 which discusses Lump-Sum Distributions or Publication 575, Pension and Annuity Income.
If taxes are withheld from my 401(k) distribution, do I have to include the amount of the distribution as income and do I pay the 10% early withdrawal fee as well?
Yes, you need to include in income the total amount of your 401(k) distribution reported on Form 1099-R (PDF),Distributions From Pensions, Annuities, Retirement on Profit-Sharing Plans, IRAs Insurance Contracts, etc. In addition, if the distribution occurs before you are age 59 1/2, you may need to pay a 10 percent additional tax on early distributions from qualified retirement plans unless you meet one of the exceptions in Publication 575, Pension and Annuity Income. You will include the federal income tax withheld on the appropriate line of your federal tax return along with any other federal income tax. Form 5329 (PDF) and instructions and Tax Topic 558 and Tax Topic 412 are available for further guidance.

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