According to data collected in 1998, nearly 14.3 million people had received at least one lump sum distribution from a qualified retirement plan at some point in their lives. While the tax rules that come hand in hand with these distributions could even make accountants queasy, there are several reasons why you may want to receive a lump sum distribution from pension plans, profit-sharing plans and stock-bonus plans maintained by your employer. However, we do recommend that you utilize a rollover IRA to avoid taxes and penalties in case you are going to use the lump sum option.

      Right now you're probably wondering what the use is of getting a lump sum distribution. Well, you may want to receive a lump sum if your pension plan does not have built in inflation adjustment buttons. A fixed monthly distribution of $4,000 won't feel so great after ten or fifteen years when the value of that amount has fallen drastically, you know. And what if you need to buy a car, make a large home improvement, or start a business as a second career? That fixed monthly payment will do no good in those scenarios either. On the other hand, a lump sum distribution would offer you increased flexibility as you responsibly decide for yourself how much of the sum to use and when to use it. Yes, discipline is the key in this situation, and most people could benefit from a quick lesson.

      You do have to take your extended family (beyond your spouse) into consideration when choosing whether to take a lump sum payment or settling for a fixed lifetime income for yourself and for your spouse after your death. As you must be aware, most pension plans offer you the opportunity to provide your spouse with a lifetime income in the event of your death. But there's no payment for non-spouse beneficiaries after you and your spouse have both gone to meet your Maker. Choosing to rollover your pension to an IRA, however, would automatically give the remaining balance to your beneficiaries. Not only will you and your spouse be satisfied in your graves - since you've met your obligations ideally - but the Maker may also give you a few extra brownie points!

      What about the penalties and tax considerations that are a part and parcel of lump sum distributions? We're asking you; don't look so blank.

      Alright, we will remind you about those only because financial planning can sometimes make you feel empty-headed!

      As a general rule, when you take money out of your retirement accounts, such as 401(k), before reaching the age of 59.5 years, you are faced with a 10% penalty. A lump sum distribution paid directly to you before the age of 59.5 years is also subject to mandatory 20% federal income tax withholding. So, if the money in your retirement account is not substantial or if you require your retirement funds on an immediate basis anyway, it is advised that you pay the appropriate taxes right away. This may entitle you to special tax treatment, such as capital gains on distributions of employer securities. If you are not eligible for special tax treatment, however, your distribution amount will be included with your other taxable income. Do keep in mind that lump sum distributions are subject to both federal and state income taxes, which are best not to be evaded unless you're looking to be the next Richard Hatch (the winner of Survivor I, who didn't pay tax on his winnings)!.

      One way to take advantage of favorable lump sum distribution tax rules is to cash out of all the retirement plans that your company operates in the same year. But, do think before doing this, because if you receive all your pension money this year and all your 401(k) money the following year, you'd end up with two lump sum distributions in two different tax years. The taxation guys haven't become so nice that they'll be ready to give you special tax treatment for two years! What were you thinking, mate?

      If you're still confused - and you probably are (remember empty-headed!), we advise you to consult a tax professional. Just remember that you really don't want to sabotage your later retirement years, so make sure that you understand the costs and benefits in the case of both lump sum distributions and a fixed lifetime income.