Question

Look up the definition of a lump-sum distribution word. Describe & write the definition with a couple of paragraphs about what you learned and why it was new to you.

Answer 1

Lump-sum distribution:

Lump-Sum Distribution is essentially a payment that is made together for the amount that is due, instead of making payments in small instalments.

Because a lump-sum distribution can have major tax consequences, it's helpful to see exactly how the IRS defines it:

"A lump-sum distribution is the distribution or payment, within a single tax year, of a plan participant's entire balance from the employer’s entire qualified pension, profit-sharing, or stock bonus plans. All of the participant's accounts under the employer's qualified pension, profit-sharing, or stock bonus plans must be distributed in order to be a lump-sum distribution."

This situation can happen when the plan holder elects to take a lump-sum payment, or happen in a few other circumstances, including:

• Death of the plan participant.
• The participant reaches age 59 ½ (early retirement age).
• The employee participant terminates employment.
• If a self-employed participant becomes "totally and permanently disabled’’.

Options for Your Lump-Sum Payout:

The best way to frame this decision is, to begin with, what not to do with your hard-earned and well-saved retirement plan money.

1. Avoid cash or check payable to you.

2. Rollover the funds.

Best way to invest a Lump sum of cash:

1. Invest it all at once.

2. Invest it in increments over some time.

Special Considerations:

• You should ask yourself why your company would want to cash you out of your pension plan. Employers have various reasons. They may use it as an incentive for older, higher-cost workers to retire early. Or they may make the offer because eliminating pension payments generates accounting gains that boost corporate income. Furthermore, if you take the lump sum, your company will not have to pay the administrative expenses and insurance premiums on your plan.
• Before choosing one option or the other, it helps to keep in mind how companies determine the amount of lump-sum payouts. From an actuarial standpoint, the typical recipient would receive approximately the same amount of money whether choosing the pension or the lump sum. The pension administrator calculates the average lifespan of retirees and adjusts the payment schedule accordingly.
• That means if you enjoy a longer-than-average life, you will end up ahead if you take the lifetime payments. But if longevity is not on your side, the opposite is true.
• One approach might be to have it both ways: Put part of a lump sum into a fixed annuity, which provides a lifetime stream of income, and invest the remainder. But if you’d rather not worry about how Wall Street is performing, a stable pension payment might be the better way to go.

The concept of Lump-sum distribution is partially new for us as we heard that Central Government employees at the time of retirement receives a lump-sum amount from the employer depending up on the number of years employees served the organisation.

However, the other aspects of lump-sum distribution are new to us those are:

• Options available to you for your lump-sum payout.
• Best way to invest a lump-sum of cash.
• How lump-sum payments are different from regular pension payments.
• Choosing between a lump-sum distribution versus an annuity from your employee pension.

Lump-sum distribution is new to me because I have never came across this term in our Finance subjects,therefore, I do not know the practicality of the term,though we had a general discussion on this concept.