Business and Personal Finance Dictionary

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• 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 a series of regular 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 pension, your employer calculates 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 pension fund estimates it would have earned in interest on that amount during the years of payout. When you take a lump-sum distribution from a salary reduction or profit-sharing plan, you receive the amount that has accumulated in the plan. You may also take a lump-sum distribution from these plans when you change jobs. However, that is usually not the case with a traditional pension plan. Whether you're retiring or changing jobs, you can take a lump-sum distribution as cash, or you can roll over the distribution into an individual retirement account (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 from the account.
  
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