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:
- Because the employee died,
- After the employee reached age 59 ½,
- Because the employee separated from the service of an employer; or
- 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
Call 1-800-829-3676 to order forms and publication, or download from this web site.
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