Q: I recently retired at age 65 and am now receiving Social Security; in April, I received shares of company stock from the profit-sharing plan that I plan to sell. My big question is what to do with the cash from the sale to defer taxes. Friends have advised me to roll it over into an IRA. Is this possible? If so, is there any maximum amount or a time limit? Can I add my husband to this IRA so we own it jointly? I have also been told to check five- and 10-year income averaging -- does this work along with an IRA rollover? Company officials told me during my retirement interview that it was not legal for them to advise me.

A: One vital piece of information is missing: Were your contributions to the plan made with before-tax or after-tax dollars? Assuming the former -- that is, that the dollars you contributed were included in your income each year and thus already were taxed -- you must first separate the distribution into two parts.

One part, equal to the total of your contributions over the years, already has been taxed and therefore is yours to do with as you wish without further tax liability. That part is not eligible for an IRA rollover, which would serve no good purpose anyway.

The other part, representing the company's contributions and accumulated earnings, may be rolled over into an IRA. There is no dollar limit on a rollover; it does not reduce the normal ceiling on annual contributions to an IRA (if you are still working), nor does it affect your eligibility for a spousal IRA based on your husband's earned income. (Apparently, however, you would not be eligible for a spousal IRA this year because you had earned income in 1986 prior to your retirement.)

The rollover must be accomplished within 60 days after you received the distribution -- which is the date in April that you received the stock, not the later date you received the sale proceeds from the broker. The rollover IRA must be in your name alone; a joint account is not permitted. But you may name your husband as beneficiary when you open the account.

Under present law, you could use four-year income averaging (no longer five-year), but unless the distribution was sizable it would save you little or no tax. Ten-year averaging, applicable only to a lump-sum distribution from a retirement plan, could be used and probably would save quite a few tax dollars; but, often, the completely tax-deferred rollover to an IRA is the better way to go.

They don't go together. That is, you don't want to roll over to an IRA after using 10-year averaging, because the money is then yours without further tax consequences. Conversely, if you use the IRA rollover route, you lose the opportunity for lump-sum averaging; whatever money is withdrawn from the IRA later is taxable as ordinary income.

As you see, I haven't really provided specific advice; that's impossible without a comprehensive review of your circumstances and future projections. But I have spelled out the options, so it should be easier now for you to make the necessary decision.

Q: In the tax guide in Washington Business on Feb. 10, under the heading "lump-sum pension payout," you stated that, if you "participate" in a retirement plan for at least five years, you can use 10-year averaging. What does "participate" mean? Do you have to contribute to the fund each year during the five-year period?

A: Before I answer your question, let me clarify what may be a misunderstanding. Ten-year averaging is not available for a distribution of any funds you (the employe) have contributed, but only for contributions made into the retirement plan by the employer on your behalf. (A Keogh plan distribution for the self-employed qualifies as employer-funded.)

Now for your specific question: To "participate," you need only be on the rolls of the plan. For example, in a bad year an employer may not make any payment into an existing profit-sharing retirement plan. But, if you were on the plan roster and would have had a payment made on your behalf had there been any contributions by the employer, then that year may be counted toward satisfying the five-year participation requirement.