1997 Tax Help Archives  

Lump-Sum Distributions

This is archived information that pertains only to the 1997 Tax Year. If you
are looking for information for the current tax year, go to the Tax Prep Help Area.

A lump-sum distribution is the distribution or payment, within a single tax year, of an employee's entire balance from the employer's qualified pension plans, qualified stock bonus plans, or qualified profit-sharing plans. If the employee has more than one account in any category, all must be distributed. Further, the distribution must have been made under one of the following four conditions:

  1. Because the employee died,
  2. After the employee reached age 59 ½,
  3. Because the employee separated from the service of an employer; or
  4. Because a self-employed individual became totally and permanently disabled.

A lump-sum distribution may qualify for special tax treatment that includes the 5-year or 10-year tax option, and the 20% capital gain treatment. These optional methods can be elected only once after 1986 for any plan participant. More information on the 5-year option can be found in Topic 555, in Publication 575, Pension and Annuity Income, and in the instructions for Form 4972, Tax on Lump-Sum Distributions.

The recipient of a lump-sum distribution may choose to use the 5 or 10 year tax option to figure the tax on the ordinary part of the distribution. The 20% capital gain election can be made to compute the tax on the taxable part of the distribution that applies to the portion received for participating in the plan before 1974. These choices allow taxpayers who have reached age 50 before 1986 ( born before 1936) to have the pre-1974 taxable portion taxed at a 20% rate, and the rest of the distribution, including the portion for all post-1973 participation, taxed as ordinary income using the 5 or 10 year option.

You should receive a Form 1099-R from your employer showing your taxable distribution and the amount eligible for capital gain treatment. If you do not receive a Form 1099-R by February 2, 1998, you should contact the payer of your lump-sum distribution.

You may choose to postpone paying tax on all or part of a lump-sum distribution by requesting your employer to directly roll over the taxable portion into an Individual Retirement Arrangement (IRA). You can also postpone the tax on a distribution paid to you by rolling over the taxable amount to an IRA within 60 days after the distribution. A rollover, however, takes away the possibility of any future special tax treatment of the distribution. See Topic 413 for more information on rollovers.

Mandatory income tax withholding of 20% applies to most taxable distributions paid to you in a lump sum from employer pension plans. For more information on the rules for lump-sum distributions, order Publication 575, Pension and Annuity Income.

Call 1-800-829-3676 to order forms and publication, or download from this web site.

Tax Topics & FAQs | Tax Help Archives | Home