lump-sum distribution

Lump-Sum Distribution

A one time payment for the entire amount due, rather than breaking payments into smaller installments. Some lump-sum distributions receive special tax treatment.

Notes:

A commission check or a pension plan distribution because of the pensioner's death are two examples of lump-sum distributions.

In general, distributions from qualified plans are treated as lump-sum, if the following requirements are met:

The total plan balance is distributed over the same tax year.

The distribution is made as a result of the employee:
- attaining age 59 1/2
- being deceased (applicable to beneficiaries)
- separates from service (not applicable to self-employed individuals - but applies to their common-law employees) or
- being disabled (applicable only to self-employed individuals).

The distribution occurs after five years of participation (this requirements is waived for beneficiaries).

See also: Capital Gains Treatment, Defined Benefit Pension Plan, Forward Averaging, Pension Plan, Qualified Distribution, Variable Death Benefit

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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.

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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