Five-year Averaging

Five-year Averaging

Five-year Averaging means:
a method of calculating income tax on a lump-sum distribution from a qualified benefit plan that reduces a beneficiary's tax liability on the distribution. This method is available only to participants who were 50 years of age or older before January 1, 1986, and had been participants in the plan for at least 5 years before the year of distribution. Five-year averaging is also available to a participant on a lump-sum distribution received after age 59V2.

The tax is calculated, at single rates, on one-fifth of the excess of the portion of the distribution subject to averaging over the minimum distribution allowance. The minimum distribution allowance is the lesser of $10,000 or half the portion of the distribution subject to averaging, minus 20% of the portion subject to averaging in excess of $20,000. The tax computed in this manner is then multiplied by 5 for the actual tax on the distribution.

See the entries Income Tax and State Income Tax in the American Encyclopedia of Law.

Description and Definition of Five Year Averaging

A special method of computing tax for qualifying lump-sum distributions from employer retirement plans for taxpayers age 59 1/2 or older. Other rules must be met to qualify but, if you do, part of the distribution may be completely tax-free. Congress voted to abolish five-year averaging as of the year 2000.


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