Question

Chapter 7 - Question 5

Generally, distributions from a retirement plan are subject to income tax as ordinary income. Which of the following tax treatments is not an exception to ordinary income on a lump-sum distribution from a qualified plan?

A.            Pre-74 capital gain treatment.

B.            Non-recognition of gain treatment.

C.            10-year forward averaging.

D.            Net unrealized appreciation.

Thank you.

Answer 1

Distributions from qualified plans are generally taxed as ordinary income, but when a distribution is considered a lump-sum distribution, the distribution may qualify for one of the following special tax treatments:

1.10-year forward averaging.

2.Pre-1974 capital gain treatment.

3.Net unrealized appreciation treatment for distribution of employer securities.

Hence, from the above we can see that non-recognition of gain treatment i.e. Option B. is not an exception to the ordinary income on a lumpsum distribution.