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 ?
In May 2013, Rozelle authorized the plans fund custodian to make lump sum distributions of all plan assets with two checks.
Rollovers as a percentage of lump sum distributions increase in tandem with the size of the lump.
For those clients who are eligible to take lump sum distributions from their qualified retirement plans, however, often overlooked considerations must be taken into account in order to take full advantage of the potential tax savings that can be realized if retirement plan assets include appreciated company stock.
And those with defined contribution plans usually elect to receive lump sum distributions or take systematic withdrawals rather than convert their payouts to annuities.
2% of plans now have no restrictions on lump sum distributions at retirement.
As a personal financial strategist and retirement distribution professional, David helps retirees invest lump sum distributions.
The taxation of lump sum distributions is discussed in Q 439.
Patterson started her comments by noting that more money has migrated to defined contribution plans and the upcoming wave of baby boomers will receive lump sum distributions.
If your plan provides for lump sum distributions, you may want to start educating your employees now about the changes in 2008 that serve to lower the dollar amount of these distributions.
Prior to the Tax Reform Act of 1996, certain individuals taking lump sum distributions from their qualified retirement plans could choose to pay the income tax on the distribution using either a five-year averaging or ten-year averaging method.
An action has also been filed against BOC's US pension plan, alleging that it wrongly calculated lump sum distributions.