Lump Sum Distributions
Overview
-
Only applies to plan participants born before January 2, 1936 (Age 89 in 2024)
-
Only distributions from an employer’s or self-employed individual’s qualified plan: profit-sharing, stock purchase, pension or 403(a) annuity plan
-
Whole balance must be distributed
-
Uses 1986 Tax Rates
-
Can only be used once after 1986
-
Distributions prior to 1986 must be included in computation
-
Must have been in plan any part of at least five years (exception – beneficiary)
-
Payment must be as a result of:
-
Separation from service,
-
Death, or
-
Disability (applies to self-employed taxpayers only).
-
Related IRC and IRS Publications and Forms
-
Form 4972 – Tax on Lump-Sum Distribution
-
Pub 575 – Pension and Annuity Income
-
IRC Sec. 402(d) (prior to amendment by the Small Business Job Protection Act of 1996)
-
IRC Sec. 402(e)(4)(D)
A “lump-sum distribution” is a special non-periodic payment that can qualify for preferential tax treatment. It is a distribution (usually of cash and/or stock) from a qualified retirement plan, and it is generally made up of several parts:
-
A taxpayer’s after-tax contributions to the plan, which are tax-free at distribution;
-
The taxable portion of the distribution attributable to pre-1974 active participation in the plan (this may qualify for long-term capital gain treatment as described below);
-
The taxable part of the distribution, which is ordinary income (post-1973 additions to the plan).