J.K. Lasser's Your Income Tax 2013: For Preparing Your 2012 Tax Return

7.2 Lump-Sum Distributions

If you are entitled to a lump-sum distribution from a qualified company retirement plan or self-employed Keogh plan, you may avoid current tax by asking your employer to make a direct rollover of your account to an IRA or another qualified employer plan. If the distribution is made to you, 20% will be withheld, but it is still possible to make a tax-free rollover within 60 days (7.7).

If you receive a lump sum and do not make a rollover, the taxable part of the distribution (shown in Box 2a of Form 1099-R) must be reported as ordinary pension income on your return unless you were born before January 2, 1936, and qualify for special averaging, as discussed below. Your after-tax contributions and any net unrealized appreciation (NUA (7.10)) in employer securities that are included in the lump sum are recovered tax free; they are not part of the taxable distribution.

A taxable distribution before age 59½ is subject to a 10% penalty in addition to regular income tax, unless you qualify for an exception (7.15).

Lump-sum distribution defined.

A lump-sum distribution is the payment within a single taxable year of a plan participant’s entire balance from an employer’s qualified plan. If the employer has more than one qualified plan of the same kind (profit-sharing, pension, stock bonus), you must receive the balance from all of them within the same year. A series of payments may qualify as a lump-sum distribution provided you receive them within the same tax ...