If you receive a lump-sum distribution from a qualified retirement plan or a qualified retirement annuity and you were born before January 2, 1936, you may be able to elect optional methods of figuring the tax on the distribution. These optional methods can be elected only once after 1986 for any eligible plan participant.
A lump-sum distribution is the distribution or payment, within a single tax year, of a plan participant's entire balance from all of the employer's qualified plans of one kind (for example, pension, profit-sharing, or stock bonus plans). All of the participant's accounts under the employer's qualified pension, profit-sharing, or stock bonus plans must be distributed in order to be a lump-sum distribution. Additionally, a lump-sum distribution is a distribution that was paid:
- Because of the plan participant's death,
- After the participant reaches age 59½,
- Because the participant, if an employee, separates from service, or
- After the participant, if a self-employed individual, becomes totally and permanently disabled.
If the lump-sum distribution qualifies, you can elect to treat the portion of the payment attributable to your active participation in the plan using one of five options:
- Report the part of the distribution from participation before 1974 as a capital gain (if you qualify) and the part of the distribution from participation after 1973 as ordinary income.
- Report the part of the distribution from participation before 1974 as a capital gain (if you qualify) and use the 10-year tax option to figure the tax on the part from participation after 1973 (if you qualify).
- Use the 10-year tax option to figure the tax on the total taxable amount (if you qualify).
- Roll over all or part of the distribution. No tax is currently due on the part rolled over. Report any part not rolled over as ordinary income.
- Report the entire taxable part as ordinary income.
If the lump-sum distribution includes employer securities and an amount is reported in box 6 of your Form 1099-R (PDF) for net unrealized appreciation (NUA), the NUA is generally not subject to tax until you sell the securities. However, you may elect to include the NUA in your income in the year the securities are distributed to you.
You should receive a Form 1099-R (PDF) from the payer of the lump-sum distribution showing your taxable distribution and the amount eligible for capital gain treatment. If you do not receive Form 1099-R by January 31 of the year following the year of the distribution, you should contact the payer of your lump-sum distribution.
You may defer tax on all or part of a lump-sum distribution by requesting the payor to directly roll over the taxable portion into an individual retirement arrangement (IRA) or to an eligible retirement plan. You can also defer tax on a distribution paid to you by rolling over the taxable amount to an IRA within 60 days after receipt of the distribution. A rollover, however, eliminates the possibility of using the special tax rules described above for any later distribution. Refer to Topic 413 for more information on rollovers. Mandatory income tax withholding of 20% applies to most taxable distributions paid directly to you in a lump sum from employer retirement plans regardless of whether you plan to roll over the taxable amount within 60 days.
For more information on the rules for lump-sum distributions, including information on distributions that do not qualify for the 20% capital gain election or the 10-year tax option, refer to Publication 575, Pension and Annuity Income, and the instructions for Form 4972 (PDF), Tax on Lump-Sum Distributions. Information is also available in Publication 17, Your Federal Income Tax for Individuals.
Page Last Reviewed or Updated: February 27, 2014