If you were born before 1936 and meet the above
tax tests your lump sum distribution that you report on your tax return may
qualify for special tax treatment that includes the 10 year averaging tax option, and the
20% capital gain tax treatment.
The 20% capital gain tax election can be made to compute the tax
on your tax return on the taxable part of the
lump sum distribution that applies to the portion received for participating in the plan before
1974. These choices allow taxpayers who were born before 1936 to have the pre-1974 taxable
portion taxed on their tax return at a 20% tax rate, and the rest of the lump sum distribution, including the portion for
all post-1973 participation, taxed on their tax return as ordinary income using the
10 year averaging tax option.
You should receive a Form 1099-R from your employer showing your taxable lump sum distribution
and the amount eligible for capital gain tax treatment on your tax
return. If you do not receive a Form 1099-R by
February 1st you should contact the payer of your lump sum distribution.
You may also want to consider an IRA rollover instead of the
10 year averaging tax option.
Mandatory tax withholding of 20% applies to
a taxable
lump sum distribution from an employer pension plan.
Pension and Annuity Income, and
IRS 
