DEFINITION of 'Forward Averaging'
Treating lump-sum retirement-plan distributions as if they occurred over a five- or ten-year period. Forward averaging is available only to qualified plan participants who were born before 1936 and meet certain requirements.
BREAKING DOWN 'Forward Averaging'
This treatment results in the distributions being taxed at a lower rate than the individual's ordinary tax rate.
To be eligible for the capital gains and forward averaging treatment, qualified plan distributions must be in the form of a lump-sum distribution.
Note: The five-year income averaging is repealed for taxable years beginning on or after January 1, 2000.