A lump-sum distribution is the distribution or payment within a single tax year of a plan participant’s entire balance from all of the employer’s qualified plans of one kind (for example, pension, profit-sharing, or stock bonus plans).

What is a lump sum payout?

A lump-sum payment is an amount paid all at once, as opposed to an amount that is divvied up and paid in installments. A lump-sum payment is not the best choice for every beneficiary; for some, it may make more sense for the funds to be annuitized as periodic payments.

When is a lump sum payment considered a distribution?

A lump-sum distribution is a distribution of the entire balance of a qualified retirement plan within one tax year. Thus, a series of payments received within one tax year will be considered a lump-sum distribution if the entire balance of a particular type of retirement plan, such as a profit sharing, pension,…

How to take advantage of lump sum payments?

To take advantage of the special tax calculation, have your employer complete Form T1198, or have him draft a note about the lump-sum payment, the circumstances of the payment, and a breakdown of the principal and interest on the payment. Use this information while completing your income tax return.

What kind of account is eligible for lump sum payments?

Eligible accounts include Registered Retirement Savings Plans (RRSPs) and Registered Pension Plans (RPPs). This rule applies to lump-sum payments from retiring allowances, as well.

Do you have to report lump sum payments as income?

Depending on the details, you may have to report all of it as income, but you may be able to avoid that requirement in some cases by transferring the funds to a qualified retirement account. You may receive lump-sum payments from registered retirement savings plans, registered pension plans and deferred profit-sharing plans.