A lump-sum distribution is the distribution (or payment) within a single tax year, of an employee's entire balance from the employer's qualified pension plans, qualified stock bonus plans, or qualified profit-sharing plans. If the employee has more than one account in any of these categories, all funds must be distributed. Further, the distribution must have been made under one of the following four conditions:

1. Because the employee died,
2. After the employee reached age 59 ½,
3. Because the employee separated from the service of the employer, or
4. Because a self-employed individual became totally and permanently disabled.

A lump-sum distribution may qualify for special tax treatment that includes the 5 year or 10 year tax option, as well as the 20% capital gain treatment. These optional methods can be elected only once after 1986 for any plan participant. (More information on the 5 year option can be found in Publication 575, Pension and Annuity Income, and in the instructions for Form 4972, Tax on Lump-Sum Distributions.

The recipient of a lump-sum distribution may choose the 5 or 10 year option to figure the tax on the ordinary part of the distribution. Note: the 5 year option is available for only those distributions made before January 1, 2000. The 20% capital gain election can be made to compute the tax on the taxable portion of the distribution that applies to the portion received for participating in the plan before 1974. Those choices allow taxpayers who have reached age 50 before 1986 (born before 1936) to have the pre-1974 taxable portion taxed at a 20% rate, while the remainder of the distribution, including the portion for all post-1973 participation, is taxed as ordinary income.

You should receive Form 1099-R from your employer showing your taxable distribution and the amount eligible for capital gain treatment. If you do not receive this form by February 1, 1999, you should contact the payer of the lump-sum distribution.

You may choose to postpone paying tax on all or part of your lump-sum distribution by requesting your employer to directly roll over the taxable portion into an Individual Retirement Arrangement (IRA). You can also postpone the tax on a lump-sum distribution paid to you by rolling over the taxable amount yourself into an IRA within 60 days after the distribution. Select Topic 413 for information on rollovers.

Mandatory income tax withholding of 20% applies to most taxable distributions paid to you in a lump sum from employer pension plans, regardless of whether or not you roll it over in 60 days.

Publications and forms may be downloaded from this site or ordered by calling 1-800-829-3676.

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