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IRS - Lump-sum distributions
IRS - Lump-sum distributions

Special tax treatments available for lump-sum distributions from qualified retirement plans.

Nicole Lacorte avatar
Written by Nicole Lacorte
Updated over 2 weeks ago

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:

  1. Capital Gain & Ordinary Income – Treat pre-1974 participation as a capital gain (if eligible) and post-1973 participation as ordinary income.

  2. 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).

  3. 10-Year Tax Option – Use the 10-year tax option for the total taxable amount (if eligible).

  4. Rollover – Roll over all or part of the distribution to defer taxes. Report the non-rolled portion as ordinary income.

  5. 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.

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