If you were born before January 2, 1936, and receive a lump-sum distribution from a qualified retirement plan or annuity, you may qualify for optional tax treatments. These elections can be made only once after 1986 for any eligible plan participant.
What’s a Lump-Sum Distribution?
A lump-sum distribution is a one-time payment of the entire balance from an employer’s qualified plan within a single tax year. It is typically paid:
Due to the participant’s death
After the participant turns 59½
Upon separation from service (for employees)
Due to total and permanent disability (for self-employed individuals)
Lump-Sum Treatment Options
You can choose from the following tax treatments for the taxable portion of your lump-sum distribution:
Capital Gain & Ordinary Income – Treat pre-1974 participation as a capital gain (if eligible) and post-1973 participation as ordinary income.
Capital Gain & 10-Year Tax Option – Apply capital gain treatment to pre-1974 participation and use the 10-year tax option for post-1973 participation (if eligible).
10-Year Tax Option – Use the 10-year tax option for the total taxable amount (if eligible).
Rollover – Roll over all or part of the distribution to defer taxes. Report the non-rolled portion as ordinary income.
Ordinary Income – Report the entire taxable portion as ordinary income.
Net Unrealized Appreciation (NUA)
If your distribution includes employer securities, the net unrealized appreciation (NUA) amount (reported in Box 6 of Form 1099-R) is not immediately taxable. However, you may elect to include it as income in the year of distribution.
Capital Gain Treatment
If eligible, your lump-sum distribution payer should provide you with Form 1099-R, which outlines:
Taxable amount
Amount eligible for capital gain treatment
If you don’t receive Form 1099-R by January 31 of the year following the distribution, contact the payer. If not received by late February, call the IRS at 800-829-1040 for assistance.
Transfer or Rollover Options
You may defer taxes on all or part of a lump-sum distribution by:
Requesting a direct rollover to an IRA or eligible retirement plan.
Rolling over the distribution yourself within 60 days of receipt.
However, rolling over the distribution means you cannot use the special lump-sum tax treatments.
Mandatory Withholding
If your lump-sum distribution is paid directly to you, the payer must withhold 20% for income tax, even if you plan to roll it over within 60 days. You may elect a higher withholding rate by providing Form W-4R.