Lump-sum distribution

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Lump-sum distribution

A single payment that represents an employee's interest in a qualified retirement plan. The payment must be prompted by retirement (or other separation from service), death, disability, or attainment of age 59-1/2, and must be made within a single tax year to avoid the federal government's 10% penalty tax.

Lump-Sum Distribution

A one-time payment of the entire amount owed to another party. Examples of lump sum distributions include life insurance pay outs, or death benefits from a pension. It is important to note that, by definition, lump-sum distributions do not occur in annuities, as annuities pay out a certain amount over time.

lump-sum distribution

With retirement plans, the disbursement of an individual's benefits in a single payment. A lump-sum distribution has important income-tax implications; therefore, the individual must investigate this option thoroughly before choosing a single payment.
When is lump-sum distribution desirable? To whom?

Lump-sum distributions from retirement plans are desirable when their special tax savings (capital gain treatment on some, ten-year tax averaging on some) are favorable when compared with taxes that may be due if the distributions were rolled over to an IRA and taxed later. Someone who needs money now to payoff debts or purchase a retirement home, or someone who will always need money from the distribution and will always be in a low tax bracket, may find the lump-sum distribution tax rules to benefit them now rather than taking their distributions over time.

Jeffrey S. Levine, CPA, MST, Alkon & Levine, PC, Newton, MA

Lump-sum distribution.

When you retire, you may have the option of taking the value of your pension, salary reduction, or profit-sharing plan in different ways.

For example, you might be able to take your money in a series of regular lifetime payments, generally described as an annuity, or all at once, in what is known as a lump-sum distribution.

If you take the lump sum from a defined benefit pension plan, the employer follows specific regulatory rules to calculate how much you would have received over your estimated lifespan if you'd taken the pension as an annuity and then subtracts the amount the fund estimates it would have earned in interest on that amount during the payout period.

In contrast, when you take a lump-sum distribution from a defined contribution plan, such as a salary reduction or profit-sharing plan, you receive the amount that has accumulated in the plan.

You may or may not have the option to take a lump-sum distribution from these plans when you change jobs.

You can take a lump-sum distribution as cash, or you can roll over the distribution into an individual retirement arrangement (IRA). If you take the cash, you owe income tax on the full amount of the distribution, and you may owe an additional 10% penalty if you're younger than 59 1/2.

If you roll over the lump sum into an IRA, the full amount continues to be tax deferred, and you can postpone paying income tax until you withdraw.

References in periodicals archive ?
The money helped pay for everything from the decommissioning of underground storage tanks and park improvements to business start-ups and lump-sum distributions to local school districts.
Two of the de-risking strategies that employers may engage include offering lump-sum distributions to retirees and/or transferring liabilities to a third party insurer.
The trend among both types of workers is to take lump-sum distributions, a strategy which seems reasonable at first glance.
It also seeks the disclosure information provided to plan participants as to the potential risks connected to lump-sum distributions.
Census Bureau data, the EBRI analyzed how employees take lump-sum distributions from their retirement plans when they change jobs.
Treasury's technical explanation says that this was done to avoid "double non-taxation" that would arise because the United Kingdom does not tax lump-sum distributions from pension plans.
Unlike most DB plans, cash balance plans usually allow lump-sum distributions.
How to figure the tax-free part of nonperiodic payments from qualified and nonqualified plans, and how to use the optional methods to figure the tax on lump-sum distributions from pension, stock bonus, and profit-sharing plans.
The taxpayer makes the election by attaching a statement to the tax return and by including the net unrealized appreciation on the tax return, either as part of a distribution reported on Form 4972, Tax on Lump-Sum Distributions From Qualified Retirement Plans, or on the appropriate line of Form 1040 (line 44 for 2009 returns).
Evans and Whipps terminated their employment with Grace in 2001 and 2002, respectively, each receiving lump-sum distributions from their Plan accounts.
The answer, according to a recent discussion of experts, is both the opportunity for helping people with retirement but also the possibility of fraudulent or inept handling of lump-sum distributions.
The PPA requires that you use certain rates to calculate lump-sum distributions for your participants, resulting in lower lump-sum distribution amounts than under current law.