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 ?
Corporate mergers and acquisitions may lead to the consolidation of two or more plans, some of which may legitimately offer fewer payment options, perhaps limited to a lump-sum distribution. The sponsor of the survivor plan, however, currently has no choice but to track the protected benefits for the participants of all of the former plans, which can greatly complicate plan administration.
"Few people know all they need to know about asset allocation, insurance, estate planning, refinancing a mortgage, how to handle a lump-sum distribution, and so on.
Was there really a perception of abuse in the lump-sum distribution area?
Of the six choices available to workers when leaving a job -- roll over to an IRA, leave it in the company plan or roll to a new company's plan, take a lump-sum distribution, make a Roth conversion or an in-plan Roth conversion -- Slott said that the right choice depends on the participant's circumstances, but "the best option is still usually the IRA rollover, to be fair to advisors."
When the employee retires, leaves the company or otherwise qualifies for a lump-sum distribution, he or she may remove the stock from the plan and put it in a taxable account but still get favorable tax treatment.
On a lump-sum distribution of employer securities, an employee will defer any tax relating to net unrealized appreciation (NUA) under Sec.
Participants in these plans contemplating taking a lump-sum distribution should make a tax-free rollover of the amount into a traditional IRA first, then take the lump-sum distribution from the IRA.
Under current law, an individual who receives a qualifying lump-sum distribution may elect to pay a tax on the lump-sum distribution that would approximate the tax that would be paid if the lump-sum distribution were received in five equal annual installments (five-year forward income averaging).
[3] This report also provides the results of recalculations of previously published lump-sum distribution estimates based on the 1989 survey.
The IRS asserted that the taxpayers had constructively received the deferred compensation benefits in 1981 since they had an "unfettered" choice in that year to receive a lump-sum distribution. The Service conceded that mere ability of a plan participant to choose among distribution alternatives at the time of entry into a plan does not result in constructive receipt of benefits.
Likewise, she was liable if she received a lump-sum distribution from a pension plan.