Lump-Sum Distribution is essentially a payment that is made together for the amount that is due, instead of making payments in small installments. Those who took birth before the year 1936 will notice that their lump-sum distributions qualify to be treated more favorably by tax in comparison to the withdrawals made from their retirement accounts. However, a lump-sum distribution takes place only when you get your complete account balance in the same year from your pension related plans that have been maintained by the same employer or from you profit-sharing plans that also includes 401(k) plan being maintained by the same employer and from stock bonus related plans being maintained by the same employer.
In case the entity that you work for operates different types of plans, you will surely get a lump-sum distribution, only if you choose to cash out of the plans in the same year. However, if you get your pension amount this year and your entire 401(k) amount the next year, then you are essentially getting 2 lump-sum distributions in two separate years. This, however, is not the most appropriate thing. Therefore, you should ensure that you get the entire amount in the same year.
What is also important to note here is that if you choose to withdraw from an SEP or IRA account, then it isn’t considered as lump-sum distribution and therefore, it never qualifies for special tax related rules. The same is applicable for any sort of the withdrawals made from delayed compensation related plans for local and state government employees.
In addition to this, those who are self-employed cannot consider the liquidating of the retirement account as a lump-sum distribution until they have attained the age of 59 and half or suffer from permanent disability. In case you are working for some company, then you must get the lump-sum distribution amount for any of the reasons listed below:
· You choose to quit, got terminated, suffered disability or died or
· You attained the age of fifty nine and half. In this particular case, you can continue to work and still continue treating your withdrawals in the form of lump-sum distribution.