Lump-Sum vs Annuity Distributions Considerations
Course: Retirement Planning
Lesson 7: Income Distribution Planning for Qualified Plans
Student Question:
In the discussion as to whether a lump-sum distribution would be appropriate instead of periodic or annuity payments, one of the issues in making that decision is “The Size of the Distribution.” I’m not really understanding what is meant by this statement, “The size of the distribution is an issue in that the relative benefit of 10-year averaging is reduced for large amounts.”
Can you help me understand what is meant?
Instructor Response:
Hi,
What we’re basically saying is that 10-year averaging can soften the tax hit from a lump-sum distribution, but the bigger the distribution gets, the less helpful that benefit becomes.
Even though the calculation “spreads” the income over 10 years conceptually, a really large distribution can still push a lot of the income into higher tax brackets within the calculation. So 10-year averaging tends to help more with moderate-sized distributions than with very large ones.
