Lump-sum distribution

(redirected from Lump-Sum Distributions)

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 1996, a plan participant may distribute $155,000 in annual benefits and $775,000 in lump-sum distributions without triggering the excess distribution tax.
We also changed the way we paid our disbursements, which include in-service, after-tax withdrawals and lump-sum distributions. Since participants liked our semimonthly loan processing, it made sense to set all disbursements to the same cycle, so we now pay every 15 days instead of once a month.
At retirement, they generally will take lump-sum distributions from their plans and roll them over into individual retirement accounts.
This option is not available when benefits are paid from the plan's trust, but the plan may, if desired, permit pensioners to make certain changes: (1) if payments began before retirement, the form may be changed on retirement; (2) new forms may be elected on plan termination (e.g., participants in pay status may be allowed to elect lump-sum distributions); (3) on marriage, a pensioner may be allowed to elect a QJSA; and (4) on a participant's death, his or her beneficiary may be allowed to elect a lump--sum distribution.
New York adopts the Federal five-year forward averaging rules for purposes of computing the separate tax on lump-sum distributions.
Annuities, both periodic and deferred, are covered along with lump-sum distributions, withdrawal of employee contributions and numerous other topics.
Asked where the bad news is, and what sponsors should be watching for, Salisbury warned against the acceleration of trends toward lump-sum distributions and the movement from defined benefit plans to defined contribution plans.
This reference is supplemented with the latest legislative, judicial and administrative developments, taking into account a broad spectrum of circumstances and special issues, including: qualified plan lump-sum distributions and periodic payments and rollovers; stock options and stock bonus plans; Social Security and healthcare benefits; and income tax and estate planning changes at retirement.
Threshold amount for purposes of the 15% excise tax on large distributions from a retirement plan for individuals electing grandfather treatment is increased from $122,580 to $128,228 (and from $612,900 to $641,140 for lump-sum distributions), effective for distributions during the 1990 calendar year.
The IRS ruled (8) that settlement distributions made to compensate present and former defined benefit plan participants for improperly calculated lump-sum distributions were not Sec.
Authors note: The discussion concerning lump-sum distributions originated from The Pension Answer Book 2000, by Steven J.
TRA 86 also provided generous transition rules for certain recipients of lump-sum distributions. If a recipient of a lump sum was age 50 or older on January 1, 1986, the recipient may choose between the old ten-year forward averaging method (using 1986's tax rates) and the new five-year averaging (using tax reform's generally lower rates).