Pension Issues: Lump-Sum Distributions and Retirement Income Security

Pension Issues: Lump-Sum Distributions and Retirement Income Security

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Pr
epared for Members and Committees of Congress

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Forty-seven percent of all workers aged 21 and older participated in employer-sponsored
retirement plans in 2006, but not all of these workers will receive a pension or other income from
these plans when they retire. Some will instead receive a “lump-sum distribution” from their
retirement plan when they change jobs. A typical 25-year-old today will work for seven or more
employers before age 65, and could receive several such distributions before reaching retirement
age.
In most cases, a lump-sum distribution from a retirement plan can be “rolled over” into an
individual retirement account (IRA) or another employer’s plan so that it will be preserved until
the worker reaches retirement age. However, many recipients of lump-sum distributions use all or
part of their distributions for current consumption rather than depositing the funds into another
retirement plan. To discourage individuals from spending their savings before retirement, regular
income taxes and a 10% additional tax are levied on most pension distributions received before
age 59½ that are not rolled over into another retirement account. In addition, employers are
required to withhold for income tax purposes 20% of distributions that are paid directly to
recipients. Although federal law allows employers to “cash out” accrued pension benefits of less
than $5,000 without obtaining the employee’s consent, employers must deposit distributions of
$1,000 or more into an individual retirement account unless they are directed to do otherwise by
the recipient.
According to data collected by the Census Bureau in 2006, 16.2 million people had up to that
time received at least one lump-sum distribution from a retirement plan at some point in their
lives. Most of them (13.9 million, or 86%) had received their most recent distribution between
1980 and 2006 and before they had reached age 60. Among this group, the average (mean) value
of the most recent distribution they received (measured in 2006 dollars) was $26,845. The median
value was $8,864. The typical recipient was 37 years old at the time of the distribution. Thus,
most recipients of lump-sum distributions were 25 or more years away from retirement.
Of survey respondents who reported that they had received at least one lump-sum distribution,
45% said that they had rolled over the entire amount of the most recent distribution into an IRA or
other retirement plan, accounting for 70% of the dollars distributed as lump sums. Another 41%
of recipients said that they had saved at least part of the distribution in some way. Of those who
reported that they received their most recent distribution between 1990 and 1999, 47% said that
they had rolled over the entire amount into another plan, accounting for 71% of the dollars
distributed as lump-sums. Of those who reported that they received their most recent distribution
between 2000 and 2006, 46% said that they had rolled over the entire amount into another plan,
accounting for 73% of the dollars distributed as lump-sums.
Lump-sum distributions that are spent rather than saved can reduce future retirement income. If
the lump-sum distributions received between 1980 and 2006 that were not rolled over had instead
been invested in retirement accounts that earned the average annual rate of return on AAA-rated
corporate bonds, they would have grown to a median value of $8,800 by 2006. In that year, the
median age of those who had not rolled over their distributions was 44. If this amount were to
remain invested until the recipient reached age 65 and earned an average annual rate of return of
6%, it would grow to a value of $29,900. With this amount, a 65 year-old man could at current
interest rates purchase a level, single-life annuity that would pay $220 in monthly income for life.
˜—?›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ

Ž—œ’˜—ȱ œœžŽœǱȱž–™Ȭž–ȱ’œ?›’‹ž?’˜—œȱŠ—?ȱŽ?’›Ž–Ž—?ȱ —Œ˜–ŽȱŽŒž›’?¢ȱ
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Overview: Pension Coverage and Tax Policy ................................................................................. 1
Preserving Retirement Assets When Changing Jobs ....................................................................... 3
How Many People Have Received Lump-Sum Distributions?................................................. 4
How Much Were the Distributions Worth? ............................................................................... 8
How Much Retirement Wealth Was Lost from Lump-Sums that Were Spent Rather
than Saved? ............................................................................................................................ 9
What Factors Influence the Rollover Decision?...................................................................... 10
Implications for Public Policy ....................................................................................................... 13

Š‹•Žœȱ
Table 1. Participation in Employer-sponsored Retirement Plans in 2006 ...................................... 2
Table 2. Disposition of Most Recently Received Lump-sum Distribution..................................... 7
Table 3. Amount of Lump-Sum Distributions in Nominal and Constant Dollars .......................... 8
Table 4. Estimated Probability of Rolling Over a Lump Sum into a Retirement Plan ................. 13

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Author Contact Information .......................................................................................................... 15

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ŸŽ›Ÿ’Ž ǱȱŽ—œ’˜—ȱ˜ŸŽ›Š?ŽȱŠ—?ȱŠ¡ȱ˜•’Œ¢ȱ
Employers who sponsor retirement plans for their employees do so voluntarily; however, an
employer who sponsors a retirement plan must comply with both the Employee Retirement
Income Security Act of 1974 (ERISA, P.L. 93-406) and the provisions of the Internal Revenue
Code that govern the tax treatment of retirement plans. Since the 1920s, Congress has provided
tax incentives for employers to sponsor retirement plans and for workers to participate in these
plans. Among the most important of these provisions are the deduction from company income of
employers’ contributions to retirement plans, the exclusion from employee income of employer
contributions, and the deferral of income taxes on investment gains until money is either
withdrawn from the plan or pension payments begin. The tax revenue forgone by the federal
government as a result of the deductions and deferrals granted to qualified retirement plans is
substantial. According to the U.S. Office of Management and Budget, the net exclusion for
employer pension plan contributions and earnings will result in $541 billion in forgone tax
revenue over the five fiscal years from 2009 through 2013.1 The substantial tax subsidy provided
to employer-sponsored retirement plans is one reason that it is important for Congress to be well-
informed about the effectiveness of these plans in helping workers to achieve income security in
retirement.
According to data collected by the Census Bureau, 47% of all workers aged 21 and older in the
United States participated in employer-sponsored retirement plans in 2006.2 (See Table 1.) Not all
of these workers, however, will receive a pension or other retirement income from these plans.
Some will not participate in the employer’s retirement plan long enough to earn the right to a
pension — a process called vesting. 3 Others will receive a “lump-sum distribution” from the plan
when they change jobs. A typical 25-year-old today will work for seven or more employers
before age 65.4 Thus, many workers are likely to receive one or more distributions from a
retirement plan before reaching retirement age. What an individual does with a lump-sum
distribution — even a relatively small one — can have a significant impact on his or her wealth
and income during retirement. Lump-sum distributions that are spent on current consumption
rather than saved for retirement will not be available to augment a worker’s retirement income.
Workers who spend lump-sum distributions from employer-sponsored retirement plans rather
than save them could be undermining their financial security in retirement.

1 U.S. Office of Management and Budget, Budget of the United States Government, Fiscal Year 2009: Analytical
Perspectives, Table 19-1, p. 291. Only the exclusion from taxes of employer contributions for employee health
insurance ($1.05 trillion) and the deduction for interest on home mortgages ($577 billion) will reduce federal income
tax revenues by more than the exclusion for pension contributions and earnings from 2009 to 2013.
2 This figure includes full-time and part-time workers in both the public and private sectors. A “retirement plan” may
be either a traditional defined benefit pension plan or a retirement savings plan, such as those authorized under Internal
Revenue Code §§401(k), 403(b), and 457(b).
3 ERISA allows sponsors of retirement plans to choose between two methods of vesting: “cliff” vesting and “graded”
vesting. Under cliff vesting in a defined benefit plan, a participant must be 100% vested after no more than five years
of service. Under “graded” vesting, a participant is 20% vested after three years, 40% vested after four years, 60%
vested after five years, 80% vested after six years, and 100% vested after seven years. In a defined contribution plan,
the vesting schedule applicable to an employer’s matching contributions may not exceed three years under year cliff
vesting or six years under graded vesting. Employers can vest participants faster than these schedules.
4 Estimated by the Congressional Research Service (CRS) from data published by the U.S. Bureau of Labor Statistics,
“Employee Tenure in 2008,” BLS News Release, USDL 08-11344, Sept. 26, 2008.
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Table 1. Participation in Employer-sponsored Retirement Plans in 2006
Wage and salary workers aged 21 and older, in thousands
Number of
Number in a
Percent in a

workers
retirement plan
retirement plan
Age

Under 35
40,438
14,221
35.2
35 to 44
31,077
15,919
51.2
45 to 54
29,970
16,937
56.5
55 or older
20,390
9,816
48.1
Race/ethnicity

White 99,328
46,994
47.3
Black 14,289
6,195
43.4
Asian/Native American
8,258
3,704
44.9
Sex

Male 63,355
30,544
48.2
Female 58,520
26,349
45.0
Marital status

Married 72,284
36,956
51.1
Not Married
49,591
19,937
40.2
Education

High School or less
40,501
14,282
35.3
Some college
44,858
20,223
45.1
College graduate
36,516
22,388
61.3
Monthly individual income (2006)

Lowest quartile
30,472
6,056
19.9
Second-lowest quartile
30,472
11,973
39.3
Second-highest quartile
30,463
17,431
57.2
Highest quartile
30,467
21,433
70.4
Size of firm where employed

Under 25 workers
24,973
4,755
19.0
25 to 99 workers
15,283
5,674
37.1
100 or more workers
81,619
46,464
56.9
Employment status

Part-year or part-time
32,527
10,938
33.6
Year-round, full-time
89,349
45,955
51.4
Total 121,875
56,893
46.7
Source: CRS tabulations from the 2004 panel of the Survey of Income and Program Participation.
Notes: Monthly income is individual income averaged over four months in 2006. Quartile rank is based on all
wage and salary workers aged 21 and older. Workers with total monthly individual income of $1,622 or less in
2006 were in the fourth (lowest) income quartile. Those with income of more than $4,300 were in the first
(highest) income quartile. Median total monthly individual income among workers 21 and older was $2,669.
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Řȱ

Ž—œ’˜—ȱ œœžŽœǱȱž–™Ȭž–ȱ’œ?›’‹ž?’˜—œȱŠ—?ȱŽ?’›Ž–Ž—?ȱ —Œ˜–ŽȱŽŒž›’?¢ȱ
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Defined benefit (DB) pension plans are required by law to offer participants a benefit in the form
of an annuity – a stream of monthly payments for life. In general, the annuity can begin no later
than the plan’s normal retirement age, which in most cases cannot be later than 65. The annuity
usually is based on the employee’s average salary and length of service with the employer. With
each year of service, a worker accrues a benefit equal to either a fixed dollar amount per month or
year of service or a percentage of his or her final pay or average pay. A worker who is vested in a
defined benefit plan and who leaves the employer before reaching retirement age can claim his or
her benefit upon reaching retirement age. According to the Pension Benefit Guaranty Corporation
(PBGC), there are 11.8 million people who are vested former participants in private-sector
defined benefit plans.5 Although employers who sponsor defined benefit plans are required to
offer participants an annuity, many also offer employees the option to take their accrued benefit
as a lump-sum when they separate from the employer.6 According to the Department of Labor,
52% of participants in private-sector defined benefit plans are in plans that offer lump-sum
distributions.7
A defined contribution (DC) plan is much like a savings account maintained by the employer on
behalf of each participating employee. The employer contributes a specific dollar amount or
percentage of pay into the account, which is usually invested in stocks and bonds. In some plans,
the size of the employer’s contribution depends on the amount the employee contributes to the
plan. When the worker retires, the benefit that he or she receives will be the balance in the
account, which is the sum of all the contributions that have been made plus interest, dividends,
and capital gains (or losses). At retirement, the worker usually has the choice of receiving these
funds as a lump sum or through a series of withdrawals. DC plans are not required to offer
annuities. A participant in a DC plan who separates from the employer before retirement
sometimes has the option of leaving his or her retirement account in the former employer’s plan.
According to data collected by the Bureau of the Census, 5.4 million people had a retirement
account in a former employer’s defined contribution plan in 2006. The mean balance in these
accounts was $43,636 and the median balance was $20,000.8 A departing participant in a DC plan
also may be allowed to withdraw the funds from the account or to deposit (“roll over”) the funds
into an individual retirement account (IRA) or into another employer’s retirement plan.
Workers who elect to take lump-sum distributions from retirement plans must decide whether or
not to roll over the distribution into another employer’s plan (if the plan accepts rollover
contributions) or into an IRA. Most distributions received before age 59½ that are not rolled over
into another retirement account within 60 days are subject to both regular income taxes and an
additional 10% tax on the amount of the distribution.

5 PBGC, Pension Insurance Data Book: 2007. In addition to the 11.8 million vested former participants, there were
20.2 million current participants and 12.1 million retired participants in private-sector defined benefit plans.
6 A lump-sum distribution from a DB plan must be no less than the present value of participant’s accrued benefit,
expressed as an annuity beginning at the plan’s normal retirement age. If the plan is a cash balance plan, the
distribution can be equal to the participant’s notional account balance. See CRS Report RS22765, Lump-Sum
Distributions Under the Pension Protection Act, by Patrick Purcell.
7 U.S. Department of Labor, National Compensation Survey: Employee Benefits in Private Industry in the United
States, 2005, Bulletin 2589, May 2007.
8 CRS analysis of the 2004 panel of the Survey of Income and Program Participation (SIPP).
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Ž—œ’˜—ȱ œœžŽœǱȱž–™Ȭž–ȱ’œ?›’‹ž?’˜—œȱŠ—?ȱŽ?’›Ž–Ž—?ȱ —Œ˜–ŽȱŽŒž›’?¢ȱ
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Congress has amended the Internal Revenue Code (IRC) several times to encourage departing
employees to leave their accrued retirement benefit in the former employer’s plan or roll over
these funds into another qualified retirement account.
• Section 72(t) of the IRC imposes a 10% tax — in addition to ordinary income
taxes — on distributions from retirement plans received before age 59½.
Distributions that are not rolled over into an Individual Retirement Account
(IRA) or another employer’s tax-qualified retirement plan within 60 days are
subject to both regular income tax and the 10% additional tax.9
• The Unemployment Compensation Amendments of 1992 (P.L. 102-318) requires
employers to give departing employees the option to transfer a lump-sum
distribution directly to an IRA or to another employer’s plan. If the participant
instead chooses to receive the distribution, the employer is required to withhold
20%, which is applied to any taxes due on the distribution.10
• IRC §411(a)(11) allows a plan sponsor to distribute to a departing employee his
or her accrued benefit under a retirement plan without the participant’s consent if
the present value of the benefit is less than $5,000.11 The Economic Growth and
Tax Relief Reconciliation Act of 2001 (P.L. 107-16) requires that if the present
value of the distribution is at least $1,000, the plan sponsor must deposit the
distribution into an IRA unless otherwise instructed by the participant.
There may be times when the recipient of a lump-sum distribution faces current expenses that are
more pressing than concerns about retirement income. This is especially so when the recipient is
in a period of unemployment or must pay for the care of a relative who is ill or disabled.
Consequently, Congress has sought to encourage recipients to roll over pre-retirement
distributions but has not required such distributions to be rolled over into an IRA or another
retirement plan. Allowing lump-sum distributions while placing an additional 10% tax on
amounts that are not rolled over represents a compromise among the competing policy objectives
of preserving assets until retirement and providing access to assets in time of need.
˜ ȱŠ—¢ȱŽ˜™•Žȱ ŠŸŽȱŽŒŽ’ŸŽ?ȱž–™Ȭž–ȱ’œ?›’‹ž?’˜—œǵȱ
According to the information reported to the Census Bureau in 2006, an estimated 16.2 million
individuals aged 21 and older had received at least one lump-sum distribution from a retirement
plan at some point during their lives. Of this number, 13.9 million people (85.8%) had received
their most recent distribution in 1980 or later and while they were under age 60. Of these 13.9

9 Under IRC §72(t), the 10% penalty is waived if the distribution is made in a series of “substantially equal periodic
payments” based on the recipient’s life expectancy or if the recipient has retired from the plan sponsor at age 55 or
older. There are other exceptions to the 10% additional tax that apply under special circumstances. See CRS Report
RL31770, Individual Retirement Accounts and 401(k) Plans: Early Withdrawals and Required Distributions, by
Patrick Purcell.
10 If the distribution is not rolled over within 60 days, the 20% withheld is applied to the taxes owed on the distribution.
If the distribution is rolled over within 60 days, the 20% withheld is credited toward the income tax that the individual
owes for the year. If the participant has received the distribution in cash, then to roll over the full amount of the
distribution, the recipient must have access to other funds that are at least equal to 20% withheld by the employer.
11 Distributions of $5,000 or more require the participant’s written consent. The $5,000 limit was established by the
Taxpayer Relief Act of 1997 (P.L. 105-34). The amount had been set at $3,500 by Retirement Equity Act of 1984. It
was originally established at $1,750 by ERISA in 1974.
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Śȱ

Ž—œ’˜—ȱ œœžŽœǱȱž–™Ȭž–ȱ’œ?›’‹ž?’˜—œȱŠ—?ȱŽ?’›Ž–Ž—?ȱ —Œ˜–ŽȱŽŒž›’?¢ȱ
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million people, 45.2% had rolled over the entire amount of the most recent distribution they had
received into another tax-qualified plan, such as an IRA or another employer’s retirement plan.
(See Table 2.) Although fewer than half of people who received a lump-sum distribution had
rolled over the entire amount into another retirement account, rollovers accounted for 70% of the
dollars distributed as lump sums. (Not shown in Table 2.)
Some recipients of lump-sum distributions who do not roll over the entire amount into another
retirement plan either roll over part of the distribution or save some of the distribution in another
way. Participants in the Census Bureau’s Survey of Income and Program Participation (SIPP)
who reported that they had not rolled over the entire amount of the most recent lump-sum
distribution they received were asked what they did with the money. Nineteen options were listed
on the survey questionnaire, and respondents could provide more than one response if they used
the money for more than one purpose. (Survey participants were asked only how they used the
money, not how much was used for each purpose). Nine of the categories listed on the survey fit
the standard economic definition of saving in that they lead to (or are expected to lead to) an
increase in a household’s net worth.12 These nine saving options were:
• investing in an IRA, annuity, or other retirement program but not through a
rollover contribution;
• putting some or all of the funds into a savings account or certificate of deposit,
• investing in stocks, mutual funds, bonds, or money market funds,
• investing in land or other real property,
• investing in a family business or farm,
• using funds to purchase a home, pay off a mortgage, or make home
improvements,
• using funds to pay bills or to pay off loans or other debts,
• saving for retirement expenses, but not through a rollover contribution, and
• saving or investing in other ways.
Among those who reported that they had received at least one lump-sum distribution since 1980
and before age 60, 41% said that although they had not rolled over the entire amount of the most
recent distribution, they had saved at least some of the distribution in one of the other ways listed
above. (See Table 2.)
The data presented in Table 2 illustrate how the likelihood of having rolled over a lump-sum
distribution varied with a number of demographic and economic variables. For example, older
workers were more likely than their younger colleagues to have rolled over a lump-sum
distribution into an IRA or other retirement plan. According to the data collected by the Census
Bureau, among workers under age 60 who received a distribution between 1980 and 2006, only
38% of those under age 35 rolled over the entire amount into an IRA or other retirement plan. Of
those who received a distribution between the ages of 35 and 44, 49% rolled over the entire

12 The other categories listed on the survey were: bought a car, boat, furniture or other consumer items; used for
vacation, travel, or recreation; paid expenses while laid off; used for moving or relocation expenses; used for medical
or dental expenses; paid or saved for education; used for general or everyday expenses; gave to family members or
charity; paid taxes; and spent in other ways. Of these, only paying or saving for education might be considered saving.
˜—?›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ
śȱ

Ž—œ’˜—ȱ œœžŽœǱȱž–™Ȭž–ȱ’œ?›’‹ž?’˜—œȱŠ—?ȱŽ?’›Ž–Ž—?ȱ —Œ˜–ŽȱŽŒž›’?¢ȱ
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amount. Fifty percent of those who received a distribution between the ages of 45 and 54 rolled
over the entire distribution, as did 58% of those who received a distribution between the ages of
55 and 59. Individuals who reported their race as white, those who were married at the time of the
survey, those with a college degree, and those whose monthly income in 2006 was in the top
income quartile were more likely to have rolled over their most recent lump-sum distribution than
those of other races, those who were unmarried, those who did not have a college degree, and
those whose incomes were in the lower three quartiles of the income distribution.13 Although
more men than women had rolled over their most recent lump-sum distribution into another
retirement plan, the difference was comparatively small (47% vs. 44%).
The characteristics of the distribution itself, as well as those of the recipient, were associated with
different probabilities that the distribution was rolled over into another retirement plan.
Distributions of less than $5,000 (measured in 2006 dollars) were less likely to have been rolled
over than were distributions of more than this amount. Only one-fourth of distributions of less
than $5,000 were rolled over, compared to almost half of distributions of $5,000 to $19,999 and
about two-thirds of distributions of $20,000 or more.
Distributions that were received mainly because of actions taken by the recipient were more
likely to have been rolled over than were distributions that resulted from events that were beyond
the recipient’s control. Fifty-one percent of distributions that were received because the recipient
retired, quit to go to school, quit to take another job, or otherwise quit voluntarily were rolled
over into another retirement account, compared to 38% of distributions that were received
because of the death of a worker or because the recipient was separated involuntarily, quit due to
illness, injury, or family obligations, or because the business where the recipient worked had
closed.
Distributions received from 1980 to 1989 were less likely to have been rolled over than were
distributions received from 1990 through 2006, but there was almost no difference in the
percentage of distributions received from 1990 to 1999 that were rolled over compared to
distributions received from 2000 to 2006. Thirty-seven percent of distributions that were received
in the 1980s were rolled over into another retirement account, compared to 47% of those received
in 1990s and 46% of those received between 2000 and 2006.

13 The individual’s marital status and income quartile in 2006 may have differed from his or her marital status and
income in the year that the distribution was received, but those two variables are not available on the SIPP.
˜—?›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ
Ŝȱ

Ž—œ’˜—ȱ œœžŽœǱȱž–™Ȭž–ȱ’œ?›’‹ž?’˜—œȱŠ—?ȱŽ?’›Ž–Ž—?ȱ —Œ˜–ŽȱŽŒž›’?¢ȱ
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Table 2. Disposition of Most Recently Received Lump-sum Distribution
Lump sums received between 1980 and 2006 by individuals under age 60
Received a
Rolled over
Saved some of Spent entire
distribution
entire amount the distribution distribution

(thousands)
(percent)
(percent)
(percent)
Age when received

Under 35
6,003
38.0 45.0
17.0
35 to 44
4,005
49.1 37.9
13.0
45 to 54
2,859
50.1
41.3
8.6
55 to 59
1,047
57.9
34.3
7.8
Race

White 12,219
47.1
40.0
12.9
Other 1,695
31.2
51.5
17.3
Sex

Male 6,532
46.7
40.4
12.9
Female 7,382
43.8 42.3
13.9
Marital status in 2006

Married 8,851
50.3
38.1
11.6
Not married
5,063
36.2
47.2
16.6
Education

High school or less
3,072
30.2
52.7
17.1
Some college
5,375
40.2
46.0
13.8
College graduate
5,463
58.4 30.6
11.0
Monthly income in 2006

Lowest income quartile
3,479
36.2 47.6
16.4
Second-lowest quartile
3,486
35.9 48.7
15.4
Second-highest quartile
3,472
44.4 43.3
12.3
Highest income quartile
3,477
64.2 26.1 9.7
Amount of distribution

Less than $5,000
4,972
26.1 52.9
21.0
$5,000 to $9,999
2,388
47.0 39.2
13.8
$10,000 to $19,999
2,277
47.7 40.4
11.9
$20,000 or more
4,278
65.0 29.8 5.2
Reason for distribution

Retired or quit job
7,511
51.0
36.1
12.9
All other reasons
6,402
38.3 47.6
14.1
Year of distribution

1980 to 1989
1,794
37.4
44.4
18.2
1990 to 1999
4,846
46.9
40.8
12.3
2000 to 2006
7,274
45.9
41.1
13.0
Total 13,914
45.2
41.4
13.4
Source: CRS tabulations from the Survey of Income and Program Participation.
Notes: Monthly income is person’s average income over four months in 2006. Quartile rank is based on income
of individuals who received a lump-sum between 1980 and 2006 before age 60. Individuals with total monthly
individual income of less than $1,464 in 2006 were in the fourth (lowest) income quartile. Those with income of
more than $4,754 were in the first (highest) income quartile. Median total monthly individual income among
those who had received a lump sum was $2,876. Lump-sum distributions were adjusted to 2006 dollars.
˜—?›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ
ŝȱ

Ž—œ’˜—ȱ œœžŽœǱȱž–™Ȭž–ȱ’œ?›’‹ž?’˜—œȱŠ—?ȱŽ?’›Ž–Ž—?ȱ —Œ˜–ŽȱŽŒž›’?¢ȱ
ȱ
˜ ȱžŒ‘ȱŽ›Žȱ?‘Žȱ’œ?›’‹ž?’˜—œȱ˜›?‘ǵȱ
The average (mean) value of lump-sum distributions paid to individuals under age 60 from 1980
to 2006 was $21,888 in nominal dollars. Expressed in constant 2006 dollars, the mean value of
the distributions was $26,845. (See Table 3) Because the mean value of lump-sum distributions is
skewed upward by a relatively small number of large distributions, the typical distribution is
more accurately portrayed by the median, which in nominal dollars was $7,500. Adjusted to 2006
dollars, the median distribution was $8,864. The typical recipient was 37 years old at the time he
or she received the most recent lump-sum distribution. Thus, most people who received these
distributions were 25 or more years away from retirement.
Table 3. Amount of Lump-Sum Distributions in Nominal and Constant Dollars
Lump-sums received between 1980 and 2006 by people under age 60
Recipient Age and Amount of Distribution:
Mean
Median
All recipients of lump-sum distributions:

Age when lump sum received
38
37
Amount of lump-sum distribution in nominal dollars
$21,888
$7,500
Amount of lump-sum distribution in 2006 dollars
$26,845
$8,864
Those who rolled over most recent distribution:

Age when lump sum received
40
39
Amount of lump-sum distribution in nominal dollars
$33,989
$12,867
Amount of lump-sum distribution in 2006 dollars
$41,032
$16,202
Those who did not roll over most recent distribution:

Age when lump sum received
37
35
Amount of lump-sum distribution in nominal dollars
$11,926
$4,500
Amount of lump-sum distribution in 2006 dollars
$15,167
$5,430
Source: CRS tabulations from the 2004 panel of the Survey of Income and Program Participation
Notes: The dollar amount of lump-sum distributions was adjusted to constant 2006 dollars based on the
Personal Consumption Expenditure Index of the National Income and Product Accounts.
The average value of lump-sum distributions differed between amounts that were rolled over and
those that were not. Among recipients who rolled over the entire amount of the most recent
distribution they received, the mean distribution was worth $41,032 in 2006 dollars. The median
value of distributions that were rolled over was $16,202. Those who did not roll over the entire
distribution received lump-sums with a mean value of $15,167 in 2006 dollars. The median value
in 2006 dollars of distributions that were not rolled over was $5,430.14 Workers who rolled over
the entire distribution were older than those who did not. The median age of those who rolled

14 The SIPP questionnaire asked those who reported receiving a lump-sum distribution, “What was the total amount of
the lump-sum or rollover?” Since enactment of P.L. 102-318 in 1992, employers have been required to withhold for tax
purposes 20% of distributions from retirement plans that are paid to the plan participant rather being directly rolled
over into another retirement plan. Lump-sum distributions can be rolled over into an IRA tax-free within 60 days, but
the recipient must have enough cash on hand to make up the difference between the gross amount of the distribution
and the amount received after 20% has been withheld for any potential tax liability. Although the SIPP asked for the
“total amount” of the rollover, we cannot determine from the survey data whether respondents who received lump sums
directly were reporting the gross amount of the distribution or the distribution net of the 20% withheld for any income
tax liability that would arise if the distribution were not rolled over within 60 days.
˜—?›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ
Şȱ

Ž—œ’˜—ȱ œœžŽœǱȱž–™Ȭž–ȱ’œ?›’‹ž?’˜—œȱŠ—?ȱŽ?’›Ž–Ž—?ȱ —Œ˜–ŽȱŽŒž›’?¢ȱ
ȱ
over the entire distribution to another retirement account was 39, while the median age of those
who did not roll over the entire distribution was 35.
˜ ȱžŒ‘ȱŽ?’›Ž–Ž—?ȱŽŠ•?‘ȱŠœȱ˜œ?ȱ?›˜–ȱž–™Ȭž–œȱ?‘Š?ȱ
Ž›Žȱ™Ž—?ȱŠ?‘Ž›ȱ?‘Š—ȱŠŸŽ?ǵȱ
Although younger workers typically receive smaller lump-sum distributions than older workers
receive, substantial amounts of retirement wealth can be lost by spending rather than saving even
a small sum, especially in the case of workers who are many years away from retirement. To
estimate the potential loss in retirement wealth incurred by individuals who did not roll over their
lump-sum distributions, CRS calculated the amounts that these individuals could have
accumulated if they had rolled over the entire distribution into another retirement plan. For
individuals who reported on the SIPP that they had not rolled over the most recent lump-sum
distribution they received, CRS calculated the amount that would have been accumulated by 2006
if the entire amount had been rolled over into another retirement account in the year it was
received. The estimates were based on two possible rates of return:
• the total annual rate of return paid by AAA-rated corporate bonds in each year
between the year the distribution was received and 2006; and
• the total annual rate of return of the Standard & Poor’s 500 stock index in each
year between the year the distribution was received and 2006.
If all of the respondents who reported that they had not rolled over their most recent lump-sum
distribution would have instead rolled over the full amount into a fund that earned the total annual
rate of return on AAA-rated corporate bonds, the distributions would have attained a mean value
of $38,256 by 2006. The median value of these accounts would have been $8,800. If the lump-
sums had been rolled over into investments that grew at a rate equal to the total annual return of
S&P 500 index, the distributions would have had a mean value of $47,811 by 2006. The median
value of these accounts would have been $8,700
If we consider age 65 to be retirement age, the typical individual who had received a distribution
but did not roll it over into another retirement account was 28 to 30 years away from retirement in
the year that he or she received the distribution. Their mean age in the year that they received
their distributions was 37 and their median age was 35. In 2006 — the year of the survey — the
median age of these individuals was 44.
As noted above, the median value of lump-sum distributions that were not rolled over would have
reached $8,700 by 2006 if they had been invested in an S&P 500 stock market index fund.
Assuming a future average annual total rate of return in the stock market of 8%, a 44 year-old
individual who invested $8,700 for 21 years would accumulate $43,800 by age 65. At current
interest rates, this would be enough for 65 year-old man to purchase a level, single-life annuity
that would provide monthly income of $315 for life.
If the lump sums that were not rolled over had been rolled over into accounts paying the same
rate of return as AAA-rated corporate bonds, they would have reached a median value of $8,800
in 2006. Assuming 44 year-old individual invested $8,800 in bonds for 21 years at an average
annual rate of return of 6.0%, it would grow to $29,900 by age 65. For this amount, a 65 year-old
man could purchase a level, single-life annuity that would provide a monthly income of $220.
˜—?›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ
şȱ

Ž—œ’˜—ȱ œœžŽœǱȱž–™Ȭž–ȱ’œ?›’‹ž?’˜—œȱŠ—?ȱŽ?’›Ž–Ž—?ȱ —Œ˜–ŽȱŽŒž›’?¢ȱ
ȱ
‘Š?ȱŠŒ?˜›œȱ —?•žŽ—ŒŽȱ?‘Žȱ˜••˜ŸŽ›ȱŽŒ’œ’˜—ǵȱ
Older recipients and those who received larger-than-average lump sums were relatively more
likely to have rolled over their distributions into an IRA or other tax-qualified retirement plan. In
other words, both the recipient’s age and the amount of the distribution were positively correlated
with the probability that a lump-sum distribution would be rolled over into another retirement
plan. Simple correlations, however, show the relationship between only two variables; for
example, between age and the likelihood of a rollover, or between the amount of the distribution
and the likelihood of a rollover. In fact, many variables simultaneously affect the rollover
decision, and some of them may interact with each other. The decision to roll over a lump-sum or
to spend it is affected not just by the recipient’s age, and not just by the size of the distribution,
but by both of these factors, and by many others simultaneously. The decision to save a lump-sum
distribution or spend it, like most choices, is made in the context of many variables.
To study the relationship between the rollover decision and a set of variables suggested by both
economic theory and previous research, CRS developed a regression model in which the
dependent, or response, variable could have two possible values: 1 (true) if the entire lump-sum
distribution was rolled over into another retirement plan, and 2 (false) if any of the distribution
was used for any other purpose. The independent variables we tested were the individual’s age in
the year the distribution was received, race, sex, level of education, monthly income in 2006, the
amount of the lump-sum distribution in 2006 dollars, the year the distribution was received, and
whether the distribution was received because of the employee’s retirement or voluntary
separation from the employer or because of reasons outside the recipient’s control.15 In the model,
we restricted the sample to lump-sums received from 1980 to 2006 by people under age 60 in the
year of the distribution. Results of the model are shown in Table 4.
Our analysis found that the variable with the strongest statistical relationship to the likelihood that
a lump-sum distribution was rolled over was the amount of the distribution, adjusted to 2006
dollars. In the regression model, lump-sum distributions were divided into four size categories:
less than $5,000; $5,000 to $9,999; $10,000 to $19,999; and $20,000 or more. Relative to
distributions of less than $5,000, the probability that a distribution was rolled over was positive
and statistically significant for all larger distribution amounts. Lump sums of $5,000 to $9,999
were 126% more likely to have been rolled over than lump sums of less than this amount. Lump-
sum distributions of $10,000 to $19,999 were 118% more likely to have been rolled over than
lump sums of less than $5,000. Distributions of $20,000 or more were 374% more likely to have
been rolled over than were distributions of less than $5,000.

15 Distributions were classified as voluntary if they were received because the recipient retired, quit to go to school, quit
to take another job, or otherwise quit voluntarily. They were classified as involuntary if they were received because of
the death of a worker or because the recipient was separated involuntarily, quit due to illness, injury, or family
obligations, or because the business where the recipient worked had closed.
˜—?›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ
ŗŖȱ

Ž—œ’˜—ȱ œœžŽœǱȱž–™Ȭž–ȱ’œ?›’‹ž?’˜—œȱŠ—?ȱŽ?’›Ž–Ž—?ȱ —Œ˜–ŽȱŽŒž›’?¢ȱ
ȱ
Interpreting the Regression Results
We used a logistic regression or “logit” for our analysis. This is a form of multivariate regression
that was developed to study relationships in which the dependent (response) variable can have
only a limited number of values, such as yes (true) or no (false). In this model, the dependent
variable indicates whether a lump-sum distribution was rolled over into another retirement
account (1 = yes; 2 = no). The model measures the likelihood of observing the dependent variable
having a value of 1 (“yes”) when a particular independent variable is changed, given that every
other independent variable is held constant at its mean value. The model estimates a coefficient
(also called a parameter estimate) for each independent variable and calculates the standard error
of the estimate. The standard error measures how widely the coefficients are likely to vary from
one observation to another. In general, the greater the absolute value of the parameter estimate,
the more likely it is to be statistically significant.
The model also generates for each independent variable a statistic called an odds ratio. The odds
ratio is a measure of how much more (or less) likely it is for a particular outcome to be observed
when a given independent variable is “true” (x=1) than it is when that independent variable is
“false” (x=0). For example, in this model, there is a variable that has a value of 1 if the recipient
received a lump-sum distribution of $20,000 or more (in 2006 dollars), and a value of 0 if the
distribution was less than that amount. Recipients of lump sums of less than $5,000 were the
reference group for the model. In Table 4, this variable is shown as having an odds ratio of 4.738.
This means that other things being equal (and measured at their mean values), a recipient of a
lump-sum distribution of $20,000 or more was 374%% more likely than a recipient of a lump
sum of less than $5,000 to have rolled over the entire distribution into another retirement plan.
As was illustrated by the data presented in Table 2, lump sums received in 1990 or later were
more likely to have been rolled over than were lump sums received between 1980 and 1989, but
lump sums received in the 1990s and those received from 2000 to 2006 were about equally likely
to have been rolled over. These relationships also held in the regression analysis. Other things
being equal, lump sums received in the 1980s were 41% less likely to have been rolled over than
those received between 1990 and 1999. The difference in the probability that a lump sum
received between 2000 and 2006 was rolled over compared to a lump sum received between 1990
and 1999 was not statistically significant.
When the effects of other variables were held constant, the reason for the lump-sum distribution
continued to have a strong statistical relationship to the probability that the distribution was rolled
over into another retirement account. Distributions that were received because the recipient
retired, quit to go to school, or quit to take another job were 36% more likely to have been rolled
over than distributions that were received because of the death of a worker or because the
recipient was separated involuntarily, quit due to illness, injury, or family obligations, or because
the business where the recipient worked had closed.
Individuals aged 35 and older were more likely to have rolled over a lump-sum distribution than
those under 35, but once other variables were controlled for, the effect of the individual’s age was
relatively small, except for those aged 55 and older, and thus nearest to retirement. Other things
being equal, individuals aged 35 to 44 were 19% more likely than those under 35 to have rolled
over their most recent lump-sum distribution, and those aged 45 to 54 were 30% more likely than
those under 35 to have rolled over their most recent lump-sum distribution. Individuals who were
55 to 59 years old were 74% more likely than those under age 35 to have rolled over their most
recent lump-sum distribution.
˜—?›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ
ŗŗȱ

Ž—œ’˜—ȱ œœžŽœǱȱž–™Ȭž–ȱ’œ?›’‹ž?’˜—œȱŠ—?ȱŽ?’›Ž–Ž—?ȱ —Œ˜–ŽȱŽŒž›’?¢ȱ
ȱ
The recipient’s highest level of education completed had a strong statistical relationship to the
likelihood that a lump-sum distribution was rolled over into another retirement account. Relative
to those with a high school education or less, recipients with some college were 49% more likely
to have rolled over their most recent distribution into an IRA or other retirement plan. College
graduates were 170% more likely than those with just a high school education to have rolled over
their most recent lump-sum distribution. The fact that rolling over a lump-sum was positively
correlated with the recipient’s overall level of education could be considered encouraging to the
prospect that savings behavior can be influenced by efforts to educate workers about the
importance of saving pension distributions for their consumption needs during retirement.
Race was also a significant variable on the model. Recipients of lump-sum distributions who
classified themselves as white were 80% more likely than non-white recipients to have rolled
over their most recent distribution into an IRA or other retirement plan. The variable indicating
the recipient’s sex also was statistically significant. Other things being equal, men were 20% less
likely than women to have rolled over their most recent lump-sum distribution into another
retirement plan. This result is of particular interest because the descriptive statistics in Table 2
showed that slightly more men than women had rolled over their most recently received lump-
sum distribution (47 vs. 44%). The regression results imply, however, that when the effects of
other variables are taken into account, men had a slightly lower propensity than women to have
rolled over a lump-sum distribution into another retirement plan.
The SIPP collected information about each respondent’s current income, but not their income in
the year that they received their most recent lump-sum distribution. We entered the individual’s
current average monthly income, expressed as a quartile ranking, into the regression model as a
proxy for income in the year the distribution was received. Recipients’ average monthly incomes
over four months in 2006 were grouped into quartiles. Those in the lowest income quartile were
omitted from the model as the reference group. Individuals with total monthly individual income
of less than $1,464 in 2006 were in the fourth (lowest) income quartile among individuals who
had received a lump-sum distribution after 1979 and before age 60. Those with income of more
than $4,754 were in the first (highest) income quartile. Median total monthly individual income
among those who had received a lump-sum distribution was $2,876. Relative to recipients with
monthly income in the lowest quartile, those whose monthly income was in the second-lowest
quartile were neither more nor less likely to have rolled over their most recent lump-sum
distribution into an IRA or other retirement account, other things being equal. Individuals with
income in the second-highest quartile were 34% more likely than those in the lowest income
quartile to have rolled over their most recent lump-sum distribution into another retirement
account, while recipients whose monthly income was in the highest quartile were 112% more
likely those in the lowest income quartile to have rolled over their most recently received lump
sum.
˜—?›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ
ŗŘȱ

Ž—œ’˜—ȱ œœžŽœǱȱž–™Ȭž–ȱ’œ?›’‹ž?’˜—œȱŠ—?ȱŽ?’›Ž–Ž—?ȱ —Œ˜–ŽȱŽŒž›’?¢ȱ
ȱ

Table 4. Estimated Probability of Rolling Over a Lump Sum into a Retirement Plan
Lump sums received between 1980 and 2006 by people under age 60
Logistic Regression Results
Response Variable: Full distribution was rolled over into an IRA or other
retirement account
Independent variable:
Weighted
Parameter
Standard

Mean
Estimate
Error
Pr > ChiSq Odds Ratio
Intercept
—
-2.541
0.158
<.0001
—
Race (1 = white)
0.878
0.588
0.108
<.0001
1.801
Sex (1 = male)
0.469
-0.226
0.070
0.0012
0.798
Age = 35 to 44
0.288
0.176
0.083
0.0336
1.192
Age = 45 to 54
0.205
0.260
0.092
0.0047
1.297
Age = 55 to 59
0.075
0.551
0.130
<.0001
1.735
Education: some college
0.386
0.396
0.091
<.0001
1.486
Education: college graduate
0.393
0.993
0.095
<.0001
2.700
Monthly income: third quartile
0.250
0.071
0.094
0.4505
1.073
Monthly income: second quartile
0.250
0.290
0.096
0.0024
1.337
Monthly income: first (top) quartile
0.250
0.752
0.104
<.0001
2.120
Lump sum amount: $5,000 - $9,999
0.172
0.816
0.097
<.0001
2.262
Lump sum amount: $10,000-$19,999
0.164
0.777
0.099
<.0001
2.175
Lump sum amount: $20,000 or more
0.307
1.556
0.088
<.0001
4.738
Received lump sum 1980 to 1989
0.129
-0.535
0.109
<.0001
0.586
Received lump sum 2000 to 2006
0.523
0.081
0.073
0.2691
1.084
Retired or quit voluntarily
0.540
0.307
0.068
<.0001
1.359
Source: Congressional Research Service.
Notes: Lump-sum distributions were adjusted to 2006 dollars. The “odds ratio” is a measure of how much
more (or less) likely it was for a lump-sum to have been rolled over when a particular independent variable was
“true” (x = 1) than it was when that independent variable was “false”(x = 0).
n = 4,527 records.
Association of Predicted Probabilities and Observed Responses:
Concordant = 74.3%, Discordant = 25.4%, Tied = 0.3%
–™•’ŒŠ?’˜—œȱ?˜›ȱž‹•’Œȱ˜•’Œ¢ȱ
The results of this analysis indicate that while fewer than half of lump-sum distributions from
retirement plans that individuals received between 1980 and 2006 were rolled over into IRAs or
retirement plans, about 70% the dollars distributed as lump sums were rolled over. Although
lump-sum distributions received since 1990 were more likely to have been rolled over than were
distributions received in the 1980s, distributions received from 2000 to 2006 were no more likely
to have been rolled over than were distributions received in the 1990s.
˜—?›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ
ŗřȱ

Ž—œ’˜—ȱ œœžŽœǱȱž–™Ȭž–ȱ’œ?›’‹ž?’˜—œȱŠ—?ȱŽ?’›Ž–Ž—?ȱ —Œ˜–ŽȱŽŒž›’?¢ȱ
ȱ
Many recipients of lump-sums who did not roll over their distributions into an IRA or other
retirement plan saved at least some of the money in another way. While 45% of lump-sum
recipients rolled over the entire amount, another 41% used at least part of their lump-sum to
purchase a home or business, invest in stocks or bonds, or to make a deposit to a savings account.
Thus, 86% of all recipients saved at least part of their lump-sum distribution. Nevertheless, taking
a distribution and saving part of it is not a tax-efficient way to save. Distributions received before
age 59½ that are not rolled over into another tax-qualified retirement plan within 60 days are
subject to both ordinary income tax and a 10% additional tax. Any part of the distribution that is
not rolled over may be subject to both income tax and the 10% additional tax.
Although the lump-sum distributions that were not rolled over tended to be relatively small —
with a median value in 2006 dollars of $5,430, compared to a median value of $16,202 for lump-
sums that were rolled over to another account — most were received by workers who were more
than 25 years away from retirement. Consequently, many of these distributions could have grown
to substantial amounts had they been rolled over into IRAs or other retirement plans. Among the
sample of lump-sum recipients examined for this report, those who did not roll over their most
recent lump sum distribution gave up retirement wealth with an estimated median value of
$43,800 at age 65 if it had been invested in stocks, or $29,900 if it had been invested in bonds.
The laws that Congress has passed with respect to taxation of early distributions from retirement
plans represent a compromise among several competing objectives, including:
• encouraging employees to participate in retirement plans,
• promoting the preservation of retirement assets,
• allowing participants to have access to their retirement savings when they would
otherwise face substantial economic hardship, and
• assuring that the tax preferences granted to pensions and retirement savings plans
are not used for purposes other than to fund workers’ future financial security.
If any one of these objectives were paramount, devising the most effective policy with respect to
lump-sum distributions would be relatively uncomplicated. If preserving retirement assets were
the only important consideration, Congress could require all distributions from pension plans to
be rolled over into another account and held there until the individual reaches retirement age.
Stricter limits on access to retirement funds before retirement, however, could inhibit employee
participation in retirement savings plans. This, in turn, could result in more people being
unprepared for retirement than currently results from some pre-retirement distributions being
spent rather than saved. Likewise, allowing easier access to retirement savings could help people
meet other important expenses, but only at the expense of less financial security in retirement.
Given the competing demands that Congress faces in devising tax policy for pre-retirement
distributions from pensions and retirement savings plans, the most likely outcome is that these
policies will continue to represent a compromise among competing objectives. Policy analysts
who have studied the effects of federal tax laws on the disposition of lump-sum distributions have
suggested several options for consideration, including changing the tax rate or the withholding
rate on lump-sum distributions that are not rolled over; having the tax rate vary with the age of
the recipient or with the size of the distribution; requiring at least part of the distribution to be
rolled over directly into another retirement plan; and encouraging plan sponsors to educate
recipients about the importance of preserving these distributions so that the funds will be
available to provide for their financial security during retirement.
˜—?›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ
ŗŚȱ

Ž—œ’˜—ȱ œœžŽœǱȱž–™Ȭž–ȱ’œ?›’‹ž?’˜—œȱŠ—?ȱŽ?’›Ž–Ž—?ȱ —Œ˜–ŽȱŽŒž›’?¢ȱ
ȱ
›˜?žŒ?ȱ—ž–‹Ž›ȱřŖŚşŜ
ž?‘˜›ȱ˜—?ŠŒ?ȱ —?˜›–Š?’˜—ȱ

Patrick Purcell

Specialist in Income Security
ppurcell@crs.loc.gov, 7-7571

˜—?›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ
ŗśȱ