If you receive a lump-sum distribution from a qualified retirement plan 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 plan participant. A qualified retirement plan, for this purpose, is a qualified employee plan or a qualified employee annuity.

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 (pension, profit- sharing, or stock bonus plans). If the participant has more than one account in any category, all the accounts must be distributed.

If the distribution qualifies, you can elect to treat the part from active participation in the plan before 1974 as capital gain taxed at a 20% rate. You can 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 Tax Topic 555.

You should receive a Form 1099R (PDF) from your employer showing your taxable distribution and the amount eligible for capital gain treatment. If you do not receive Form 1099-R by February 1, 2002, you should contact the payer of your lump-sum distribution.

You may choose to postpone paying 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). You can also postpone the tax on a distribution paid to you by rolling over the taxable amount to an IRA within 60 days after the distribution. A rollover, however, takes away the possibility of any future special tax treatment of the distribution. Refer to Tax Topic 413 for more 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 you plan to roll over the taxable amount within 60 days.

More information on the rules for lump-sum distributions can be found in Publication 575 (PDF), Pension and Annuity Income, and in the Form 4972 Instructions (PDF), Tax on Lump-Sum Distributions.

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