What are the tax implications of taking my retirement as a lump-sum distribution?
The tax implications of lump-sum distributions are extremely complex. First, let's clarify that the lump-sum distribution is from pension plans, profit-sharing plans, and stock-bonus plans and not from an IRA. The general rule is that you treat the entire amount as ordinary income in the year you receive the distribution. This (usually) large sum of money could push you into a higher tax bracket and reduce your deductions, due to the IRS's phase-out rules for personal exemptions and itemized deductions. Furthermore, you are subject to a 10% penalty tax on the distribution if you receive it when you are less than 59 1/2 years old (or 55 years old in certain instances)
Taxpayers born before 1936 can compute their tax as if the lump-sum distribution were made evenly over ten years. One must use the 1986 single-payer tax rates in this instance. In addition, taxpayers born before 1936 can also elect to treat the pre-1974 portion of the lump-sum distribution as a capital gain, subject to a 20% tax rate
The best advice regarding a lump-sum distribution is to roll it over into an IRA if at all possible. This will allow you to continue to defer income taxes until you make withdrawals from your IRA.
Peter M. Bergevin, PhD, Professor of Accounting, School of Business, University of Redlands, Redlands, CA
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