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

7.3 Lump-Sum Options If You Were Born Before January 2, 1936

If you expect to receive a lump-sum distribution eligible for averaging (7.2), you must decide whether to pay tax currently using the averaging method (and possibly the 20% capital gain method for pre-1974 participation), or to defer tax by making a tax-free rollover (7.7). If you receive more than one lump sum during the year, you must make the same choice for all of them; you may not roll over one lump sum and claim averaging for another.

If you do not instruct the payer to make a direct rollover (7.8), 80% of the taxable distribution will be paid to you; a 20% tax will be withheld. If you later decide to make a rollover, you have 60 days from the time of receiving the distribution to do so (7.8). However, to avoid tax on the entire distribution, you will have to include in the rollover an amount equal to the withheld tax. Withholding is discussed further at 7.8 and 26.11. Ordinary income tax rates apply to the amount not rolled over, unless you are eligible for averaging or the 20% capital gain method.

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Planning Reminder

Once in a Lifetime Election

You are allowed to elect averaging only once as a plan participant after 1986. If you were born before January 2, 1936, have not previously elected averaging, and elect averaging for a distribution received in 2012, you will not be able to claim averaging ...