Experience and Benefits

Taxation of Qualified Lump Sum Distributions

Special Tax treatment is accorded certain lump sum distributions from qualified plans. These rules are not applicable to IRA's.

(a) Definition: A qualified lump sum distribution:

  1. must be completely distributed to you within one taxable year;
  2. must be the "entire balance to your credit";
  3. must be made by reason of your death, attainment of age 59‑1/2, separation from service, or disability, and
  4. must be made from a qualified plan.

(b) Qualifying Recipients: Special lump sum distribution treatment applies to all amounts you receive from all plans (but not IRAs) during the taxable year. They are available to any individual, estate, or trust. But, you may elect lump sum distribution treatment only once after you attain age 59 l/2.

  1. Special Exception. If you were 50 years old before January 1, 1986, you will be entitled to elect averaging treatment before you attain age 59‑1/2, assuming the distribution otherwise satisfied the lump sum distribution requirements. You will not be entitled to elect averaging treatment again on any lump sum distributions received after attaining age 59‑1/2.
  2. Surviving Spouse. Your surviving spouse may elect lump sum distribution treatment for a distribution pursuant to your account after your death, regardless of your age at death or the surviving spouse's age at the time of your death.
  3. Minimum Period of Service. You may only elect ten or five‑year averaging if you have been a participant in the plan for five or more taxable years before the taxable year in which the distribution is made.
  4. No Rollover of Portion of Distribution. Neither capital gain nor averaging is available if you rollover any portion of the lump sum distribution. Section 402 (a) (6) (C).

(c) Tax Treatment: The tax treatment of lump sum distribution was significantly changed by TRA 86.

  1. Ten Year Averaging. If you attained age 50 before January 1, 1986, you are entitled to elect ten‑year averaging utilizing 1986 tax rates or five‑year averaging using the tax rates in effect at the time of the lump sum distribution. TRA 86 Section ll(h)(3). The preferable method will depend upon the size of the distribution. Ten‑year averaging is more advantageous below $500,000 and five‑year averaging is better above $500,000.

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