If you were born before January 2, 1936, and you receive a lump-sum distribution from a qualified retirement plan or a qualified retirement annuity, 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.
What's a Lump-Sum Distribution?
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). Additionally, a lump-sum distribution is a distribution that's 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.
Lump-Sum Treatment Options
You can elect to treat the portion of a lump-sum distribution that's attributable to your active participation in the plan using one of five options:
- Report the taxable part of the distribution from participation before 1974 as a capital gain (if you qualify) and the taxable part of the distribution from participation after 1973 as ordinary income.
- Report the taxable 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.
Net Unrealized Appreciation
If the lump-sum distribution includes employer securities and the payer reported an amount in box 6 of your Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. (PDF) for net unrealized appreciation (NUA) in employer securities, 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.
Capital Gain Treatment
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 your Form 1099-R isn't made available to you by January 31 of the year following the year of the distribution, you should contact the payer of your lump-sum distribution. Or, if by the end of February you haven't received your Form 1099-R, you may call us at 800-829-1040 for assistance; refer to Topic No. 154 for more information.
Transfer or Rollover Options
You may be able to defer tax on all or part of a lump-sum distribution by requesting the payer to directly roll over the taxable portion into an individual retirement arrangement (IRA) or to an eligible retirement plan. You may also be able to 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. If you do a rollover, the regular IRA distribution rules will apply to any later distributions, and you can't use the special tax treatment rules for lump-sums (described earlier). For more information on rollovers, refer to Topic No. 413 and visit Do I Need to Report the Transfer or Rollover of an IRA or Retirement Plan on My Tax Return?
Mandatory income tax withholding of 20% applies to most taxable distributions paid directly to you in a lump sum from employer retirement plans even if you plan to roll over the taxable amount within 60 days.
For more information on the rules for lump-sum distributions, including information for beneficiaries and alternate payees, information on distributions that don't qualify for the 20% capital gain election or the 10-year tax option, and including information on NUA treatment for these distributions, refer to Publication 575, Pension and Annuity Income and the instructions for Form 4972, Tax on Lump-Sum Distributions (PDF). Information is also available in Publication 17, Your Federal Income Tax for Individuals.