Use ten year averaging to compute tax
401k : It may be that you cannot afford to roll over all of your retirement distribution because you need the money. And if you do need the money, you don’t want to give up a large chunk of the distribution to income taxes. Although there is no way to avoid paying taxes if you elect not to roll over the distribution, you may be able to compute the tax using the method called then year averaging, which can reduce your total bill.
Who is eligible?
You are eligible to use ten year averaging if you satisfy all of the following conditions:
- You were born before 1936
- You have not used ten year averaging on any distribution since 1986
- You participated in the plan for at least five years, which means you or your employer made a contribution to your plan account in the last five separate years before the year of the distribution.
Which distributions are eligible?
Even if you are eligible, you may use ten year averaging only if your distribution also qualifies. Your distribution will qualify only if both of the following are true:
- The distribution to be averaged must be the entire amount of your qualified plan or qualified annuity. You cannot roll over part of the distribution and you cannot have rolled over part of it in the past.
- You must receive the distribution all within one tax year, even if you receive more than one payment.
How is it computed?
If you receive a distribution and elect to use ten year averaging, the tax on the distribution itself is computed on the IRS Form 4972 and recorded on a separate line of your tax return. You must pay that amount to the IRS even if you owe no other income taxes. 401k
The tax is calculated as though you were a single individual and as though you received the distribution in then installments over ten years. Despite this calculation, you pay the total tax due in the year of the distribution not over ten years.
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