Question about Form 4972, 10-Year Special Averaging For Lump Sum Distribution

[mlpinvestor]

Hi, all.

I was in Turbotax working on a 1099-R for an inherited 401(k), when it brought up a question about using a "Form 4972 (Tax on Lump-Sum Distributions) for a payment received for this same deceased person."  I had never heard of this, so I searched it out and found this: https://fiscalwisdom.com/what-you-need-to-[product key removed]al-10-year-averaging/.  Apparently, it’s possible to take a total distribution from certain "qualifying" retirement accounts and pay the tax as if it were spread out over ten years in the lowest bracket.

What I can’t find out for sure is whether a 401(k) is a "qualified plan" for purposes of this rule.  This would really work to my advantage if it’s allowed.  Turbotax documentation states that the distribution must be from "a qualified pension, profit-sharing or stock bonus plan, but not from an IRA [or] tax-sheltered annuity (section 403(b) plan)."  However, I don’t know if this is an exhaustive and exclusive list, and it’s not clear why a qualified retirement account like a 401(k) should be treated differently from these other exotic things.  Does the IRS consider a 401(k) an "annuity?"

I do appear to meet the other requirements.  Original participant was born before 1936, no rollovers (just transfer of ownership to beneficiaries), full account value withdrawn, etc.

Thanks for any advice.

[BrittanyS]

A 401k is considered a qualified retirement account.  According to the IRS, a 401K is a "A retirement plan that meets the requirements of Internal Revenue Code Section 401(a) is referred to as a "qualified plan." IRC Section 401(a) sets standards for retirement plans"

If you qualify for form 4972, you will have 5 options to choose from.  See the options below provided by TurboTax:

• partial withdrawal as a capital gain and the remainder as ordinary income
• partial withdrawal as a capital gain.  the remainder use the 10-year tax option
• use the 10-year tax option for the entire withdrawal
• roll over the distribution, and report any withdrawals as ordinary income
• report the entire distribution as ordinary income

• 401k plan qualifications
• What is form 4972?

[mlpinvestor]

Thanks, Brittany.  So it sounds like I should be able to use Form 4972, if you mean to say that 401k plans are eligible for it.  My taxes went way down by doing that.

Curiously, Turbotax didn't actually present me with the capital gain alternatives.  I took the distribution as a single lump sum, so that may be why?  Does it automatically select the option, or combination of options, that will result in the lowest tax when you tell it to use the 10-year method?  By that, I’m referring to the two capital gain alternatives you mentioned, in lieu of or in addition to the 10-year averaging.

Much appreciate the help.

[BrittanyS]

Yes, lump sum payments can cause taxes to go up.  One way to reduce the tax burden is to take smaller distributions instead of one lump sum.  This can help reduce tax bracket jumps that result in higher taxes being paid.  The option would be selected based on the interview questions you answered.  You can view these calculations but viewing the tax return in TurboTax.  To view Online follow these steps:

1. Sign in to TurboTax
2. Select Tax Tools from the left side panel
3. Select Tools
4. Select View Tax Summary
5. Select Preview 1040

To view on the Desktop Version follow these steps

1. Login to TurboTax Desktop
2. Select Forms in the upper right corner
3. Select form 4972

@mlpinvestor