Lump-Sum Distributions

Special provisions apply to individuals born be-

TIP fore January 2, 1936. While this publication no

longer includes detailed information on the spe- cial tax treatment of lump-sum distributions paid to these individuals, you can find more information under Lump-Sum Distributions in the 2024 Pub. 575, available at IRS.gov/Pub575.

For individuals born on or after January 2, 1936, lump-sum distributions are taxed as ordinary income un- less properly rolled over into an IRA or another qualified plan. An exception exists for NUA, where employer stock basis is taxed as ordinary income and appreciation is taxed later at capital gains rates. These individuals do not qualify for the 10-year averaging or capital-gain treatment under Internal Revenue Code section 402(d). Mandatory 20% withholding applies unless a rollover occurs.

Taxable and tax-free parts of the distribution. The taxable part of a lump-sum distribution is the employer’s contributions and income earned on your account. You may recover your cost in the lump sum and any NUA in employer securities tax free.

Cost. In general, your cost is the total of:

• The plan participant’s nondeductible contributions to the plan,

• The plan participant’s taxable costs of any life insurance contract distributed,

• Any employer contributions that were taxable to the plan participant, and

20 Publication 575 (2025)

• Repayments of any loans that were taxable to the plan participant.

You must reduce this cost by amounts previously distributed tax free.

Net unrealized appreciation (NUA). The NUA in employer securities (box 6 of Form 1099-R) received as part of a lump-sum distribution is generally tax free until you sell or exchange the securities. (See Distributions of em- ployer securities under Figuring the Taxable Amount , ear- lier.) However, you may choose to include the NUA in in- come at the time of distribution but only if you elect not to use NUA treatment. In this case, the full value of the securities is taxed as ordinary income in the year of distribution and no portion qualifies for capital gain treatment under the NUA rules. See the Instructions for Form 4972 for more details.

Losses. You may be able to claim a loss on your return if you receive a lump-sum distribution that is less than the plan participant’s cost. You must receive the distribution entirely in cash or worthless securities. The amount you can claim is the difference between the participant’s cost and the amount of the cash distribution, if any.

However, for tax years after 2017, miscellaneous itemized deductions subject to the 2%-of-adjusted-gross-income limit are suspended and therefore not deductible on Schedule A (Form 1040).

Rollovers to SIMPLE retirement accounts. You can also roll over amounts from a qualified retirement plan (as described next) or an IRA into a SIMPLE retirement account as follows.

1. During the first 2 years of participation in a SIMPLE retirement account, you may roll over amounts from one SIMPLE retirement account into another SIMPLE retirement account.

2. After 2 years of participation in a SIMPLE retirement account, you may roll over amounts from a SIMPLE retirement account, a qualified retirement plan, or an IRA into a SIMPLE retirement account.

Qualified retirement plan. For this purpose, the following plans are qualified retirement plans.

• A qualified employee plan.

• A qualified employee annuity.

• A tax-sheltered annuity plan (403(b) plan).

• An eligible state or local governmental section 457 deferred compensation plan.

Eligible rollover distribution. An eligible rollover distribution is any distribution of all or any part of the balance to your credit in a qualified retirement plan except the following.

1. Any of a series of substantially equal distributions paid at least once a year over:

a. Your lifetime or life expectancy,

b. The joint lives or life expectancies of you and your

beneficiary, or

c. A period of 10 years or more.

2. A required minimum distribution (RMD) (discussed later under Tax on Excess Accumulation ).

3. Hardship distributions.

4. Corrective distributions of excess contributions or excess deferrals, and any income allocable to these distributions, or of excess annual additions and any allocable gains (see Corrective distributions of excess plan contributions under Taxation of Nonperiodic Pay- ments , earlier).

5. A loan treated as a distribution because it doesn’t satisfy certain requirements either when made or later (such as upon default), unless the participant’s accrued benefits are reduced (offset) to repay the loan. See Loans Treated as Distributions , earlier, and the discussion of plan loan offsets, including qualified plan loan offsets, under Time for making rollover , later.

6. Dividends paid on employer securities.

7. The cost of life insurance coverage.

In addition, a distribution to the plan participant’s beneficiary isn’t generally treated as an eligible rollover distribution. However, see Qualified domestic relations order

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A loss under a nonqualified plan, such as a com- mercial variable annuity, is deductible in the same manner as a lump-sum distribution.