IRS Form 4972 Instructions: Lump-Sum Distributions and 10-Year Averaging

IRS Form 4972 is the form eligible taxpayers use to calculate a separate, potentially lower tax on a lump-sum distribution from a qualified retirement plan, using 10-year averaging on the ordinary income portion and a flat 20% rate on any pre-1974 capital gain portion. These instructions walk through who qualifies, which numbers on your 1099-R feed the calculation, how each part of the form works, and how to decide whether the election actually saves you money. The eligibility gate is narrow: the plan participant must have been born before January 2, 1936, so if that date doesn’t apply to you or to the person whose distribution you inherited, the rest of the form isn’t available to you.¹

Confirm You Qualify Before Anything Else

Every one of these conditions has to be met. The plan participant must have been born before January 2, 1936. A beneficiary, estate, or trust can use the form if the deceased participant met that birth date.¹

The payment itself has to qualify as a lump-sum distribution: the entire balance of all the employer’s qualified plans of the same kind (all pension plans, all profit-sharing plans, or all stock bonus plans) paid out inside a single tax year. Partial payouts and distributions split across two calendar years don’t qualify.²

One of four events must have triggered the payment: the participant’s death, separation from service (common-law employees only, not the self-employed), total and permanent disability of a self-employed participant, or the participant reaching age 59½.²

The participant must also have been in the plan for at least five tax years before the year of the distribution. That five-year rule is waived only when a beneficiary receives the payment after the participant’s death.¹

You Get One Election, Ever

After 1986, only one Form 4972 election is allowed per employee. If the participant or a beneficiary already used the form for a prior distribution tied to that employee, the option is gone for good on any future distribution connected to the same person.³ Estates and trusts are bound by the same one-time rule.¹

Any Rollover Kills the Election

If any portion of the distribution was rolled over into another qualified plan or an IRA, Form 4972 is off the table. Part I of the form asks about rollovers directly, and a “Yes” answer ends the calculation. Even a partial rollover disqualifies the part that stayed with you.¹ Once money moves, the 10-year averaging option is forfeited permanently for that distribution.

Pull These Four Numbers From Form 1099-R

Your plan administrator sends Form 1099-R after paying the distribution. Four boxes feed Form 4972:

Box 1, gross distribution. The full amount paid, including any after-tax contributions.⁴
Box 2a, taxable amount. This is your working number for the averaging calculation.⁴
Box 3, capital gain. The pre-1974 slice inside Box 2a that gets the flat 20% rate rather than averaging.⁴
Box 4, federal income tax withheld. Not part of the Form 4972 math; it shows up as a credit on Form 1040.⁴

If the participant joined the plan entirely after 1973, Box 3 will be zero and you skip the capital gain election.

Working Through Part II: 10-Year Averaging

Part II handles the ordinary income portion of the distribution: everything in Box 2a that isn’t the pre-1974 capital gain in Box 3. If Box 3 is zero, the full Box 2a amount is your ordinary income figure. Otherwise, subtract Box 3 from Box 2a to isolate it.

Minimum Distribution Allowance

The Minimum Distribution Allowance shrinks the taxable base for smaller distributions and phases out entirely at $70,000. If your adjusted total taxable amount is $70,000 or more, skip this step.¹

For distributions under that threshold, the MDA is calculated in three steps: multiply the adjusted total taxable amount by 50%, capped at $10,000; subtract $20,000 from the adjusted total taxable amount (treat a negative as zero); and multiply that result by 20%, then subtract it from the first figure.¹

A quick example. On a $45,000 distribution, Step 1 caps at $10,000. Step 2 gives $25,000 ($45,000 minus $20,000), and 20% of that is $5,000. The MDA is $10,000 minus $5,000, or $5,000.

The Averaging Math

Subtract the MDA from the ordinary income figure (the result cannot go below zero). Add $2,300 to that adjusted number. The $2,300 replicates the 1986 zero-bracket amount; it’s part of the formula, not extra income.³

Divide by 10. Look up the tax on that one-tenth amount using the 1986 single-filer tax rate schedule printed in the Form 4972 instructions. Your actual filing status and current-year brackets don’t matter here; the 1986 single schedule applies to every filer.¹

Then compute the 1986 tax on just the $2,300 add-on and subtract it from the tax on the one-tenth amount. That removes the artificial $2,300 from the answer. Multiply the result by 10. That final number is the tax on the ordinary income portion of your distribution.

Part III: The 20% Rate on Pre-1974 Amounts

Part III applies only when Box 3 of your 1099-R is nonzero. Multiply the Box 3 amount by 0.20. That’s the tax on the pre-1974 capital gain portion.¹

The rate is fixed at 20% regardless of income level or filing status. The MDA and the $2,300 have nothing to do with this section. Because a participant would have needed to start contributing before 1974 for any Box 3 amount to exist, the pre-1974 portion tends to be small relative to the total distribution.

If the Distribution Includes Employer Stock

When employer stock is part of the payout, Net Unrealized Appreciation rules kick in. NUA is the difference between the stock’s cost basis inside the plan and its market value on the distribution date.¹

By default, the NUA isn’t taxed at distribution. It’s deferred until you sell the shares, then taxed as long-term capital gain regardless of your post-distribution holding period. Only the cost basis is ordinary income in the distribution year.³

You can elect to include the NUA in current-year taxable income instead, in which case the ordinary income slice flows into the Part II averaging calculation. Form 4972 includes an NUA Worksheet that separates the ordinary income and capital gain components.¹ For most taxpayers with meaningful NUA, deferring and paying long-term capital gain rates on eventual sale is the better outcome.

Part IV and Reporting the Result

Part IV adds the Part II averaging tax and the Part III 20% tax together. That combined figure is your special tax on the lump-sum distribution, self-contained and separate from your other income.

Report the total on Schedule 2 of Form 1040 or Form 1040-SR as an additional tax, and attach the completed Form 4972 to your return.¹ Without the attached form, the IRS treats the full distribution as ordinary income. The Box 4 withholding gets claimed as a credit on Form 1040 the same way any withholding does.

Whether the Election Is Worth Making

The IRS calls the Form 4972 method “special formulas used to figure a separate tax on the distribution that may result in a smaller tax than if you reported the taxable amount of the distribution as ordinary income.”¹ The operative word is “may.”

The benefit comes from isolation. Without the form, the distribution stacks on top of your salary and other income and can push a large chunk into the 32%, 35%, or 37% brackets under current law.⁵ With 10-year averaging, the distribution is taxed on its own using 1986 single-filer rates that range from 11% to 50%. One-tenth of a $200,000 distribution is $20,000, taxed at the low end of the 1986 schedule.

The math tips the other way in two situations. If your other income is minimal, ordinary treatment can keep the distribution in current-law brackets (10% or 12%) that are lower than the 1986 schedule’s 11% starting rate. And if the distribution is very large, the 1986 top rate of 50% can exceed today’s 37% ceiling even after the stacking effect.

Run both calculations before filing. Figure your total tax using Form 4972, then figure it treating the distribution as ordinary income, and file whichever produces the lower number. The election is voluntary, so if ordinary treatment wins this time, you keep the one-time Form 4972 election in reserve for a future qualifying distribution from a different employer’s plan.

1
Internal Revenue Service. Form 4972, Tax on Lump-Sum Distributions
2
Internal Revenue Service. Topic No. 412, Lump-Sum Distributions
3
Office of the Law Revision Counsel. 26 USC 402 – Taxability of Beneficiary of Employees Trust
4
Internal Revenue Service. Instructions for Forms 1099-R and 5498
5
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026, Including Amendments From the One, Big, Beautiful Bill