What Is a Lump-Sum Distribution?

A lump-sum distribution is a one-time lump-sum payment f🌺rom an amount of money owed to some party, rather than via payments broken into smaller installments. In certain cases, lump-sum distributions may receive special tax treatment. Lump-sum distributions are commonly associated with choosing how to receive windfall earnings, such as from winning the lottery, or from a retirement or pension plan🅺. Lump-sum distributions can be contrasted with annuitized distributions.

How a Lump-Sum Distribution Works

It is not always best to take the lump-sum payment in lieu of periodic annual payments; if offered the choice, consider taxes, investments, and the 澳洲幸运5开奖号码历史查询:net present value (NPV), which accounts for the 澳洲幸运5开奖号码历史查询:time value of money.

In general, distributions from qualified plans are treated as lump sums if the total plan balance is distributed over the same tax year, anওd if the distribution is made as a result of the employee:

• Attaining age 59½
• Being deceased (applicable to beneficiaries)
• Separating from service (not applicable to self-employed individuals but applies to their common-law employees)
• Being disabled (applicable only to self-employed individuals)

Pension plans don't allow participants to take 澳洲幸运5开奖号码历史查询:early withdrawals or loans from the funds.

L🥂ump-Sum Distꩵribution and Qualified Retirement Plans

If a pension plan owner passes away, a lump-sum distribution will often transfer to a 澳洲幸运5开奖号码历史查询:beneficiary or beneficiaries. These can be relati♐ves, close acquaintances, or even institutions such as charities. Beneficiaries can be♌ revocable or irrevocable, have discretionary powers (or not).

Qualified plans generally fall into two categories: 澳洲幸运5开奖号码历史查询:defined benefit and 澳洲幸运5开奖号码历史查询:defined contribution. Defined benefit plans give employees a guaranteed payout; this places the risk on the employer to save and invest properly to meet plan liabilities. For employees in a defined contribution plan, the amount they receive in retirement depends on how well they save and invest on their own behalf during their working years. A 401(k) is the most pop🐟ular exam💜ple of a defined contribution plan.

Other examples of qualified plans that 💃may grant lump-sum di꧙stributions include:

• Profit-sharing plans
• 403(b) plans
• 457 plans
• Money purchase plans
• Target benefit plans
• Employee stock ownership (ESOP) plans
• Keogh (HR-10)
• Simplified Employee Pension (SEP)
• Savings Incentive Match Plan for Employees (SIMPLE)

The Internal Revenue Service (IRS) provides . This guide breaks down each plan ಞand who they best suit, draws comparisons among them, and notes risks or concerns for po🗹tential or current investors.

Commission Check and Qualified Retirement Plans

Commission checks are another example that can be paid out as lump-sum payments. Commission checks apply to roles mainly in sales and marketing either as sole earnings or in addition to a base salary. Emplo♏yers often use sales commissions to incentivize workers to produce more value. Several major types of commission checks include a base salary and commission, straight commission, draw against commission, and💫 residual commission.

Lump-Sum vs. Annuity Payments

To illustrate how lump-sum and annuity payments work, imagine you won $10 million in the lottery. If you took all the winnings as a꧃ lump-sum payment, they would be subject to income tax in that year, and you would be in the highest tax bracket.

However, if you choose the annuity option, the payments could come to you over several decades. For example, instead of $10 million in income in one year, your annuity payment might be $300,000 a year. Although the $300,000 would be subject to income tax, it would likely keep you out of the highest state tax brackets. You would also avoid the highest federal income tax bracket of 37% (as of 2024) for single people with incomes greater than $609,350 or $731,200 for married couples filing jointly.

In 2025, those figures go up. Single people with incomes greater than $626,350 and married couples filing jointly with incomes up to $751,600 are in the 37% tax bracket. Such tax questions depend on the size of the lottery win, current income tax rates, projected 澳洲幸运5开奖号码历史查询:income tax rates, your state of residency when you win, in which state🎶 you will live after the win, and investment returns. But if you can earn an annual return of more than 3% to 4%,🦩 the lump sum option usually makes more sense with a 30-year annuity.

Another big advantage of taking the money over time is that it provides winners with a "do-over" card. By receiving a check every year, winners have a better chance of managing their money properly, even if things go badly the first year.

The Bottom Line

A lump sum distribution is a one-time withdrawal from an annuity, pension, or retirement account. Depending on your circumstances, lump sum distributions may be subject to mandatary withholding or certain reporting requirements. Consider whether a lump sum distribution is right for you or if you're better served taking periodic payments.