special averaging method for inherited distribution for employee savings plan

[nstillwell]

My father participated in an employee saving plan.  When he died at 73 in (2005), my mother was the beneficiary of his savings plan.  She received distributions from his plan until her death last year (2023).  Myself and my three siblings then received a lump sum distribution of the remaining funds in the account.   We each received a 1099-R with the taxable amount and the state & federal tax withheld.  Turbo Tax is allowing me to use the Special Averaging Method for the distribution which reduces my overall tax liability by quite a bit.  Is it legit to use this method?   How does this work?  Is this something that I (Turbo Tax) will be carrying over for the next 9 years?  Needless to say, this makes me nervous...

[NS371]

Guess the experts are stumped on this one?  No one have any input on this?

[DaveF1006 · Accepted solution]

Yes, this is perfectly legitimate to use. The IRS mentions this in this link that you may use this if you qualify.  Turbo Tax will generate Form 4972 for you once you enter your retirement plan withdrawal, and if you meet a series of special requirements. 

It appears that Turbo Tax is allowing you this Special Averaging Method because it does ask you a series of questions to see if you meet the requirements. If you answered these truthfully and to the best of your knowledge, you will be allowed to use this method. 

How it works is that you're treated as if you're receiving the payout over ten years for tax purposes. Instead of declaring the lump sum payment this year, the payment is spread over the next ten years in equal amounts. So if you declare the first payment this year, you will be responsible for reporting this the next 9 years in your return. Keep track of your payments. I am not certain that Turbo Tax will track this so you have the responsibility of tracking this yourself. Keep all of your tax returns together for the next ten years to track your reporting.

Here is some more information you can review regarding tax on lump sum distributions. When you read this, first scroll through the pdf until you reach the instructions for form 4972. There is a wealth of information there.

Tax on lump Sum Distributions

@nstillwell 

[nstillwell]

@DaveF1006 , Thank you for the info.  That answered most of my questions.  But one that I just cant get specifics on,  (and I think I know the answer).  To question 3 in part I  "was this paid to you as a beneficiary of a plan participant who was born before January 2, 1936.  My father was the plan participant (the employee), and he was born prior to 1936.  He died and passed the plan to my mother (not an employee), who was NOT born before 1936.  She passed the plan to us.  Do I answer yes or no to this question.

[DaveF1006]

Yes. You would answer this question yes because your father was the original plan participant.