Save time with our cheat sheets, fact sheets, checklists & books!

February 17, 2009

Lump Sum Distribution

Your Guide

Share on print
Print
Share on facebook
Share on twitter
Share on pinterest
Share on linkedin

Definition

  • Distribution or payment, within a single tax year, of a plan participant’s entire balance from all of the employer’s qualified pension plan, profit-sharing plan, or stock bonus plans. All the participants account balances under the employer’s qualified pension, profit-sharing, or stock bonus plans must be distributed in order to be a lump-sum distribution.  The distribution must occur as a result of one of the following:
    1. on account of the employee’s death,
    2. after the employee attains age 59 ½  ,
    3. on account of the employee’s separation from service, or
    4. after the employee has become disabled (within the meaning of IRC § 72 (m)(7)),
  • All trusts which are part of a plan shall be treated as a single trust
  • All pension plans maintained by the employer shall be treated as a single plan,
  • All profit-sharing plans maintained by the employer shall be treated as a single plan, and
  • All stock bonus plans maintained by the employer shall be treated as a single plan,

Referring Cite

IRC § 402(d)(4) , IRS Form 4972

Additional Helpful Information

  • Lump-sum distributions are eligible for special tax treatment, including income-averaging, which s a tax treatment where lump-sum distributions from qualified plans are treated as if they were distributed averagely over a five-year or ten-year period, beginning with the year the distribution occurs. However, the distributions are in fact distributed in one year and applicable taxes are paid on the amount for the year the distribution occurs.
  • The five-year income averaging was repealed under the Small Business Job Protection Act of 1996 ( SBA ’96) effective for distributions that occur after 12/31/1999
  • If an employee receives a lump-sum distribution in one year and receives an additional distribution in a later year, this ( additional) distribution will not disqualify the lump-sum distribution if it is attributed to additional contributions made to the account for the employee’s last or a subsequent year of service. For instance:

Assume the employee terminates from service last year and took a lump-sum distribution (last year). Next year, he receives a contribution to his account. A distribution of that contribution amount will not affect the lump-sum distribution he took last year and the lump-sum treatment he applied to that amount still stands.Cite:Prop. Treas. Reg. § 1.402(e)-2(d)(1)(ii)(B)

Written By

Denise Appleby

Denise is CEO of Appleby Retirement Consulting Inc., a firm that provides IRA resources for financial/ tax/legal professionals. She has over 20 years of experience in the retirement plans field, which includes training and technical consultation.

Denise writes and publishes educational /marketing tools for advisors; available at http://irapublications.com. Denise co-authored several books on IRAs

Denise is a graduate of The John Marshall Law School, where she obtained a Masters of Jurisprudence in Employee Benefits, and has earned 5 professional retirement designations.
She has appeared on numerous media programs, sharing her insights on retirement tax laws.

Share on facebook
Share on twitter
Share on pinterest
Share on linkedin
Share on print
More

Keep Learning

Deduction

Definition A deduction is a Tax write-off which is allowed for contributions to traditional IRAs or employer sponsored plans. Individuals who are active participants are

Annual Addition Limit

Definition The annual Addition limit is the maximum amount that may be added to a defined contribution plan on behalf of a participant for any

SIMPLE 401(k) Plan

Definition A SIMPLE 401(k) plan is a 401(k) plan  established by a small business for it’s employees. Earnings accrue on a tax-deferred basis and distributions

Salary Deferral Contribution

Definition A contribution made pursuant to a participant’s election to have a portion of his/her salary/wages  contributed to his/ her employer sponsored plan  rather than

Be among the first to know when

IRA Rules
Change