Form 4972: Tax on Lump-Sum Distributions

The rules below come from the 2025 Form 4972 and its instructions, as of October 2026.

The eligibility test in Part I

Part I is a yes or no checklist. If any answer rules you out, you don't use the form.

1. Was it the participant's entire balance from all of an employer's qualified plans of one kind, such as pension, profit-sharing or stock bonus plans? If no, stop.
2. Did you roll over any part of it? If yes, stop.
3. Were you paid as the beneficiary of a participant born before January 2, 1936? Or were you the participant, born before that date, and in the plan for at least 5 years before the year of the distribution? If neither, stop.
4. Has Form 4972 been used after 1986 for an earlier distribution from the same participant's plan? If yes, stop. It can only be used once per participant.

What doesn't qualify

• Distributions from an IRA.
• Distributions from a section 403(b) tax-sheltered annuity.
• A distribution in the first 5 tax years the participant was in the plan, unless it was paid because the participant died.
• US Retirement Plan Bonds distributed with the lump sum.
• A distribution from a plan that received a rollover after 2001 from an IRA, a governmental 457(b) plan or a 403(b) annuity on the participant's behalf.
• Corrective distributions of excess deferrals or contributions.

The two special calculations

Option	How it works	Where it's figured
20% capital gain election	The capital gain part, from Form 1099-R box 3, is taxed at a flat 20%	Part II
10-year tax option	The ordinary income part is taxed as if received over 10 years, using the special rate schedule in the instructions, then multiplied by 10	Part III
Both	Capital gain at 20% plus the ordinary income part under the 10-year option	Parts II and III

Part III includes a minimum distribution allowance. Half of the adjusted total taxable amount, capped at $10,000, is reduced by 20% of anything over $20,000, so the allowance disappears once the amount reaches $70,000, as of October 2026.

The point most beneficiaries miss

Because the participant must have been born before January 2, 1936, this form now matters mostly to people who inherit a plan payout. A beneficiary can use it if the participant met the birth date test, and the 5-year participation rule doesn't apply when the payout was made because the participant died.

Using it as a beneficiary doesn't use up your own election. The IRS example is a person whose mother and father were both born before January 2, 1936: they can make one election for their own plan, one as their mother's beneficiary and one as their father's, filing a separate Form 4972 for each. All lump sums received for the same participant in one tax year must be treated the same way on a single form.

Reporting it on your return

• If you use Part III, don't include any of the distribution on Form 1040, lines 5a and 5b. The separate tax goes on line 16 with box 2 checked.
• If you use only Part II, report just the ordinary income part, box 2a minus box 3 of Form 1099-R, on lines 5a and 5b.
• If you don't use the form, report the gross distribution on line 5a and the taxable amount on line 5b.
• Estates and trusts attach Form 4972 to Form 1041 and use Schedule G, line 1b.

Lines in Part III you'll want to understand

• Line 8: start from Form 1099-R box 2a, minus box 3 if you also made the capital gain election in Part II. Multiple recipients, and anyone electing to include net unrealized appreciation, follow the extra steps in the instructions.
• Line 9: the death benefit exclusion only applies to a beneficiary of a participant who died before August 21, 1996.
• Line 11: the current actuarial value of any annuity contract, from Form 1099-R box 8, is added in to work out the rate, then backed out later.
• Line 18: any federal estate tax attributable to the lump sum is subtracted before the 10-year calculation.
• Lines 23 and 24: one tenth of the amount is taxed using the special Tax Rate Schedule in the instructions, then multiplied by 10 on line 25.

Alternate payees can use the form too: a spouse or former spouse of a participant born before January 2, 1936, who receives a qualified lump sum under a qualified domestic relations order, can figure the tax on it with Form 4972. For the wider rules on retirement payouts, see Form 5498 for what was paid in.

Your payer's Form 1099-R gives the figures: box 2a for the taxable amount, box 3 for the capital gain part, box 6 for net unrealized appreciation in employer securities and box 8 for the value of any annuity contract.

The verdict

Form 4972 is narrow but valuable: if the participant was born before January 2, 1936, and the whole balance came out in one year without a rollover, the 10-year option and 20% election can cut the tax well below ordinary rates. Run the numbers with and without it, because once it's used for a participant, it can't be used for that participant again.

Frequently asked questions

Who can use Form 4972?

A participant born before January 2, 1936, who was in the plan for at least 5 years, or the beneficiary of such a participant, receiving a qualified lump-sum distribution of the entire balance in one tax year.

Can I use Form 4972 for an IRA?

No. Distributions from an IRA and from a 403(b) tax-sheltered annuity don't qualify.

What is the 20% capital gain election?

It taxes the capital gain part of the distribution, shown in Form 1099-R box 3, at a flat 20% in Part II of Form 4972.

Do I pay the 10-year option tax over 10 years?

No. You pay the separate tax once, for the year you receive the distribution.

How often can Form 4972 be used?

After 1986, only once for each plan participant. A beneficiary election doesn't affect the beneficiary's own election.