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Lump-Sum Distributions and Retirement Income SecurityA typical 25-year-old today will work for seven or more employers before reaching age 65, and thus could receive several such distributions before reaching retirement age. Lump-sum distributions allow workers to re-invest their retirement assets so that they will continue to grow until retirement. However, many recipients of lump-sum distributions use all or part of the distribution for current consumption rather than placing it in another retirement plan. To encourage individuals to "roll over" these distributions into another retirement plan, Congress in 1986 enacted a 10% excise tax on pre-retirement pension distributions that are not rolled over. In 1992, Congress required employers to withhold for income tax payment 20% of distributions that are paid to recipients rather than rolled into another retirement plan. In 2001, Congress required that, unless the plan sponsor is otherwise directed by the participant, it must deposit distributions of $1,000 or more into an individual retirement account. According to data collected by the Bureau of the Census in 1998, 39.5 million workers age 21 or older participated in retirement plans that offered a lump-sum distribution as a payment option. This represented 74.2% of the 53.3 million workers who were covered by a pension, profit-sharing, or retirement savings plan in 1998. Approximately 14.3 million people reported that they had received at least one lump-sum distribution at some time in their lives. The average (mean) value of these distributions was $15,400 and the median value was $5,000. The typical recipient was between 36 and 39 years old at the time of the most recent distribution. Thus, most recipients of lump sums were more than 20 years away from retirement. Of those who reported that they had received at least one lump-sum distribution, 36% said that they had rolled over the entire amount of the most recent distribution into another retirement plan, accounting for 59% of the dollars distributed as lump sums. Another 48% of recipients said that they had saved at least part of the distribution in some other way. Of those who reported receiving a distribution after 1992, 42% said that they had rolled over the entire amount into another plan, accounting for 70% of the dollars distributed as lump-sums. Another 44% of this group said that they had saved at least part of the distribution. Lump-sum distributions that are spent rather than rolled over into another retirement account can reduce future retirement income. If the lump-sum distributions received up to 1998 that were not rolled over had instead been rolled over into accounts that grew at the same historical rate as the Standard & Poor's 500 Index, they would have grown to a median value of $12,930 by 2002. If these distributions had been rolled over into accounts that paid the same historical rates of return as U.S. Treasury bonds, they would have grown to a median value of $7,980 by 2002. Read the full report by clicking here. | ||||
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