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If he takes a lump sum distribution it will be added to his other income for the year and taxed at his tax bracket which is based on his taxable income after adjustments, deductions, and exemptions. For example, if he is single, the lump sum amount is $45,000 and his other income for the year is $40,000 then he would have to pay approximately $10,000 (25%) in federal income taxes on the lump sum amount. If he leaves his company prior to age 55 then there would be an additional penalty tax of $4,000 (10%). In addtion, there may also be state income taxes.