Get Lump Sum Distributions

If you take a lump-sum distribution, even using Form 4972, the retirement plan administrator typically withholds 20% of your withdrawal and sends it to the IRS on your behalf. If your ultimate tax liability is lower than 20%, you can claim that part back when you file your taxes.

Key Takeaways A lump-sum distribution is an amount of money due that is paid all at once, as opposed to being paid in regular installments. Lump-sum distributions may be made from retirement plans, commissions earned, windfall earnings, or certain fixed-income investments.

An example of a lump sum payment would be if someone won the lottery and received their winnings all at once in one large payment. Another example might be if someone sold their house and received the entire sale price in one lump sum.

Under this method, you refigure the taxable part of all your benefits (including the lump-sum payment) for the earlier year using that year's income. Then you subtract any taxable benefits for that year that you previously reported. The remainder is the taxable part of the lump-sum payment.

Investors can avoid taxes on a lump sum pension payout by rolling over the proceeds into an individual retirement account (IRA) or other eligible retirement accounts.

How it works: Under a tax code provision that's been on the books for decades, someone born before January 2, 1936 can use ten-year income averaging to determine the tax liability of an LSD from a quali ed plan.

Investors can avoid taxes on a lump sum pension payout by rolling over the proceeds into an individual retirement account (IRA) or other eligible retirement accounts.

Essentially, you may qualify for “ten-year averaging” when you receive a lump-sum distribution (LSD) from a qualified plan. In effect, you're treated as if you're receiving the payout over ten years for tax purposes, thereby reducing the overall tax liability.