For a qualified distribution, do participants still pay taxes based on

[Guest dhoefer]

For a qualified distribution, do participants still pay taxes based on ten year averaging?

[mbozek]

Only if the participant attained a certain age ( 50 as of 12/31/85?), the distribution is paid in a lump sum and the participant has at least 5 yrs of service. The real question is why would a participant want to elect 10 yr averaging which requires the use of the 1986 tax rates (i.e., 14? separate tax brackets). Most tax advisors discourage the use of 10 yr averaging above a certain amount because of the high marginal tax rates.

[Guest Harry O]

10-year averaging is generally "better" than 5-year averaging for "smaller" distributions. Its been a few years since I studied this, but for payments of less than $400,000, 10-year averaging is better. This is because the pre-TRA '86 law had a number of tax brackets and it took awhile to start getting to rates that exceeded the post-TRA '86 rates.

[mbozek]

The pre 86 tax rates were graduated from 11 to 50% and for LS purposes are the rates for a single person with no exemptions. By my rough calculations a 400k distribution would be subject to a tax of 102K which is quite a bite out of the distribution which if compounded tax free in an IRA at 8% for 10 years would be $220k. The only reason to take 10 yr averaging would be to remove the $102k in taxes from the estate of the employee for estate tax purposes. The employee needs to have a tax advisor do the calculations to find out the amt of the tax and the amount of investment income lost if the taxes are paid.

[RCK]

For the record, the Special Tax Notice says that 10 year averaging is available to anyone who takes a lump sum distribution and was born before January1, 1936. So mbozek is correct on that point.