Qual Plan & Qualified Lump Sum Distribution for 10yr avg
Need confirmation on tax issue for a new client.
Basic facts: Client’s aunt retired and left her retirement plan balance in her employer’s plan. At 70-1/2 aunt began taking RMDs. Then she died in 2001 and client (now the beneficiary) continued taking the RMDs through 2005. In 2006 client withdrew remaining balance of retirement plan.
Client’s aunt was born before Jan 2, 1936 and client used Form 4972 on self-prepared 2006 1040 to take advantage of 10-yr averaging tax calculation. The IRS’ proposed adjustment includes the distribution in AGI, no 4972, and a much higher tax amount due.
Q1: For the beneficiary, is the 10-yr averaging treatment not available because the 2006 final distribution was not a qualifying lump sum distribution because the benficiary had continued taking the RMDs each year after the aunt died?
Q2: For the beneficiary, had she withdrawn the entire balance in the year the aunt died, or possibly the following year, would she have been eligible for 10-yr averaging?
Q3: Does taking RMDs either by the aunt, or by her beneficiary after death, disqualify a subsequent year’s lump sum distribution from 10-yr averaging?
Anyone run into this situation before?
Thanks for your response!
Permalink Submitted by Alan Spross on Sat, 2007-12-22 06:05
It is not apparent why the IRS is disallowing 10 year treatment here. Have they not indicated why? Possibilities are that the 4972 was not correctly completed and/or did not match up to the 1099R. Intervening distributions are NOT an issue with the 10 year option as they are with NUA LSDs, however this option can only be used once per plan participant. There are a few other specialized actions including rollovers into the plan that could disqualify this, and they are listed in Pub 575, p 19 (06 edition).
Since there are quite a few potential disqualifiers here, but none that you have stated, I guess the best approach is to get the IRS to outline what their problem is with use of the 10 year option.
Permalink Submitted by Michael Lindauer on Thu, 2007-12-27 22:27
Thanks Alan!
Everything else checked out okay (1099-R, 4972, no rollovers, etc) and it was only the “intervening distributions” as you called the RMDs that were a question to me. Also asked a local CPA who also confirmed that the RMDs are not the issue.
So, will contact the IRS now that I know I’m on firmer ground and will get them to explain specifically their reasoning for disallowing 10-yr averaging.