Pension Distribution

[Unregistered]

Client has accepted lump sum option with regards to pension distribution (as opposed to receiving payments for life). When employer mailed check it was made out to JP Morgan (custodian of clients IRA) fbo my client. Can a lump sum pension distribution be put into an IRA? If the client chooses not to put the money in her IRA what is the taxability of the distribution? My client is a 65 year old female, if age makes a difference. I keep reading something about those born before 1934 in some of the pubs, but it's not making much sense.

Thanks in advance!

JoshInNC

[Bees Knees]

Yes you can roll a lump sum distribution into an IRA.

TTB, page 13-21, Lump-Sum Distributions, "If a plan participant was born before January 2, 1936 (at least age 69 in tax year 2005) and takes a lump-sum distribution in 2005 from a qualified retirement plan and does not roll any of the distribution over into another plan or IRA, the participant may be eligible to elect to pay tax at the special 10-year averaging rates...."

If the money was rolled over into an IRA, then ignore the lump-sum distribution rules. Rolling a lump-sum distribution over into an IRA is in most cases the smartest thing to do.

[Unregistered]

OK, here's our plan

The client plans to use the money within the next 6 - 12 months to purchase property in Myrtle Beach. We plan to take the distribution, pay the tax as required, and purchase tax exempt bond funds with the net proceeds. The client will then use the tax exempt dividends to build up the amount in the account. Then, when we sell the funds to purchase the property, we get to take capital gains treatment on the gain, as opposed to ordinary income tax. This should save them a little in tax, over the 12 month period.

Now, I understand that the 1099-R will show any built up cap. gains in the account, which can be taxed at 20%. However, the client's tax rate, even with the distribution will only be 15%, so can we elect not to take the 20% rate?

Thanks for all your help!

JoshInNC

[Bees Knees]

You said your client was 65 years old. Your client does not qualify for lump-sum treatment, because she was not age 69 in 2005, so I don't see how you can get capital gain treatment out of the deal.