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Income averaging: Age has its rewards

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in Small Business Tax

Q. I’m finally retiring for good this year at 72. My financial planner is encouraging me to roll over my retirement plan funds into an IRA. But won’t I benefit from income averaging if I take it out in cash? J.L.D., Fort Myers, Fla.

A. Possibly. Although five-year income averaging is no longer available for lump-sum distributions, retirees can still qualify for special 10-year averaging if they were born before 1936. In effect, this allows you to have the distribution taxed as if it had been spread out over 10 years, reducing the overall tax hit. Also, you may be eligible for special capital gain treatment attributable to pre-1974 plan participation. Weigh the benefits of 10-year averaging against the tax deferral of a rollover. Tip: Plan participants can elect 10-year averaging only once.

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