Consideration

Rollover IRA

Lump Sum Distribution form a Qualified Plan

Generally

Lump sum distributions form qualified plans may be transferred to an "individual retirement arrangement" called a rollover IRA. To avoid the mandatory 20% federal income tax withholding rule, the payment must be made directly to the IRA.

The taxpayers may never choose to take all of a qualified retirement plan distribution outright and pay the tax. IRC Sec. 402(d). There will be a mandatory 20% federal income tax withholding. Some states may also require income tax withholding.

Taxation at Distribution

No tax is due at the time of the transfer of the IRA, but later distributions are taxed as ordinary income. The IRA must begin distribution by April 1 the following year in which the individual attains age 70 ½. Taxpayers over age 65 may also qualify for the credit for the elderly, as well as the higher standard deduction.

Tax payers age 50 or more in 1/1/86 will have a choice at retirement to: (1) Pay tax at capital gains rates, on pre-1974 portion and at ordinary income rates for the post-1974 portion, or (2) elect 10 year averaging for the post-1974 portion or the entire amount at 1986 rates, or (3) Use the one time election of a five year averaging at current tax rates. All other taxpayers must select option 3.