Lump-sum distribution

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 ?
Scripps Company (NYSE: SSP) is offering its eligible former employees with vested, deferred pension plan benefits the option of receiving their benefits either as a lump-sum distribution or an immediate annuity payment.
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An employee retiring at full retirement age can take a partial lump-sum distribution of up to 30 percent of the account balance, with a reduced annuity.
Additionally, Belo said it was going to offer "certain pension plan participants" who have a current value of $30,000 or less, a lump-sum distribution.
An individual who receives appreciated employer securities as part of a lump-sum distribution may elect under section 402(e)(4)(B) to have the net unrealized appreciation included as ordinary income in the year of the distribution.
Since 2008, the IRS has allowed you to roll your plan assets as a lump-sum distribution directly to a Roth IRA and be taxed as if you took the distribution "outright"--meaning that you could treat the distribution as taxable only on the stock's cost, and never having to pay the capital gains portion of the tax ever (as all qualified Roth distributions are tax free).
If your plan is funded below that level, you are restricted from increasing benefits, accelerating the vesting of benefits, and paying benefits in the form of a lump-sum distribution.
The lump-sum distribution option often excites some retiring employees, as it looks like a lot of money they can get their hands on today, instead of waiting longer to reap the benefits through annuity payments.
Not all 401(k)s, savings plans, profit sharing plans, and the like allow for an immediate lump-sum distribution to be made to the nonparticipant spouse.
For example, a participant could elect a lump-sum distribution upon disability but an annuity upon attaining age 65.
marketing at AFLAC, argues that among other benefits, an indemnity-based (or pay-as-you-go) approach prevents somebody who gets a lump-sum distribution from spending it unwisely.