Topic 412 - Lump–Sum DistributionsIf you receive a lump–sum distribution from a qualified retirement plan or
a qualified retirement annuity and the plan participant was born before 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
pension, profit-sharing, or stock bonus plans. All the participants accounts under
the employer's qualified pension, profit-sharing, or stock bonus plans must be distributed
in order to be a lump-sum distribution.
If the lump-sum distribution qualifies, you can elect to treat the portion of the
payment attributable to your active participation in the plan before 1974 as long-term
capital gain taxed at a 20% rate. You can also elect to figure the tax on the rest
of the distribution using the 10–year tax option. For information on the 10–year
tax option, refer to Topic 555.
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 February
1, 2004, 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
that your employer directly roll over the taxable portion into an Individual Retirement
Arrangement (IRA) or to another 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 any future
special tax treatment of the 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 pension 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 to Form 4972 Instructions (PDF), Tax on Lump–Sum Distributions.