Chartered Retirement Planning Counselor (CRPC) Practice Exam 2026 - Free CRPC Practice Questions and Study Guide

Forward averaging is a method used primarily to determine tax liability on lump-sum distributions from retirement plans. When a participant elects forward averaging, it allows them to average out the distribution over a specific period, which can result in lower tax rates applied to the distribution. This technique is advantageous as it can mitigate the tax impact of receiving a large lump-sum payment.

This method must be elected for any lump-sum distribution, which means that if a distribution qualifies for forward averaging, the participant needs to explicitly choose this option to benefit from the tax treatment it provides. The requirement for the election ensures that participants are given the opportunity to optimize their tax situation based on their individual financial circumstances.

The other choices do not accurately reflect the nature of forward averaging. It does not apply universally to all participants regardless of age, it does not provide immediate tax relief for early withdrawals (which typically incur penalties), and while it is related to lump-sum distributions, it is not limited to only those distributions since it is a voluntary tax choice that participants can select based on their needs.