Lump-Sum Pension Payout Taxation refers to the tax implications associated with receiving a one-time payment from a pension plan, as opposed to ongoing monthly distributions.
When an individual opts for a lump-sum payout, the entire amount is typically subject to federal income tax in the year it is received. This can lead to a higher tax bracket, increasing the overall tax liability for that year. Additionally, if the payout is not rolled over into a qualified retirement account, such as an IRA, it may be subject to a mandatory 20% withholding for federal taxes.
For example, if an individual receives a lump-sum pension payout of $100,000 and does not roll it over, the IRS may withhold $20,000 for taxes, leaving the recipient with $80,000 upfront. However, they are still responsible for reporting the full amount on their tax return, which could result in additional taxes owed depending on their overall income for the year.
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