Understanding 457 Plan Rmd Rules for Retirement

If you're approaching retirement age and have a 457 plan, it's essential to understand the Required Minimum Distribution (RMD) rules.

The RMD rules apply to 457 plans, which are tax-deferred retirement accounts offered by state and local governments, as well as tax-exempt organizations.

You'll need to take RMDs starting at age 72, which will be taxed as ordinary income.

The first RMD is due by April 1 of the year following the year you turn 72, but subsequent RMDs are due by December 31 of each year.

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A 457 plan is a type of retirement savings plan offered by tax-exempt organizations, such as state and local governments, and certain non-profit organizations.

These plans are designed to help employees save for retirement on a tax-deferred basis, meaning you won't pay taxes on the contributions until you withdraw the funds.

Contributions to a 457 plan are made with pre-tax dollars, reducing your taxable income for the year.

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You can contribute up to a certain amount each year, and the plan administrator will let you know the exact limit.

Some 457 plans offer a catch-up contribution option, allowing you to contribute extra money if you're 50 or older.

The money in your 457 plan grows tax-deferred, meaning it's not subject to income tax until you withdraw it.

Withdrawals from a 457 plan are taxed as ordinary income, and you'll need to pay taxes on the withdrawals in the year you take them.

You can withdraw money from your 457 plan at any time, but be aware that you may face penalties for early withdrawals.

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In most cases, the retirement plan administrator will inform the employee what their RMDs are. This is a crucial step in ensuring compliance with the 457(b) RMD rule.

It's up to the individual to make sure they're withdrawing in line with the RMD, and there are penalties for not doing so.

Pre-tax contributions to a 457(b) plan reduce the employee’s taxable income for the year. These contributions and all associated earnings are not subject to tax until withdrawal.

Employees can make after-tax Roth contributions, which allow for potentially tax-free withdrawals.

The contribution limits for 457(b) plans are specified for the current calendar year, so be sure to check the latest limits if you're considering contributing.

Employees may be able to make after-tax Roth contributions, which allow for potentially tax-free withdrawals.

RMD rules have changed under the SECURE 2.0 Act, increasing the RMD age from 72 to 73 in 2023 and then to 75 in 2033.

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If you're leaving your employer, you'll want to know about the 457(b) plan's rules. You can delay taking your initial minimum required distribution (RMD) from your active governmental 457(b) plan until April 1 following the year you retire from that employer.

The RMD rules for 2020 were waived, so if you took your initial minimum distribution from your qualified plans prior to 2020, your next RMD won't be due until December 31, 2021. This applies to your prior employers' plans.

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You can roll over your remaining qualified retirement plan accounts into your active 457(b) plan to delay RMDs on those amounts until you eventually retire. However, you should complete these rollovers prior to the end of 2020.

Withdrawals from a 457(b) plan are generally taxable, but the 10% penalty tax does not apply to distributions prior to age 59½.

You'll need to take responsibility for making sure you're withdrawing from your 457(b) plan in line with the RMD, or you'll face penalties.

The retirement plan administrator will typically inform you what your RMDs are, making it easier to stay on track.

It's essential to understand the 457(b) RMD rule to avoid any potential issues or fines.

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If you're still working for the employer sponsoring your 457(b) plan, you won't need to take your initial minimum required distribution until April 1 following the year you retire from that employer.

The RMD rules for 2020 were waived, so if you took your initial minimum distribution from your qualified plans prior to 2020, your next RMD won't be due for those plans until December 31, 2021.

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You can roll the remaining qualified retirement plan accounts into your active 457(b) to delay RMDs on those amounts until you eventually retire, but only if your current 457(b) plan will accept such rollovers.

The SECURE 2.0 Act increases the RMD age from 72 to 73 in 2023, and then to 75 in 2033, or the year of retirement, if later, for certain plan participants who are not 5 percent owners.

Individuals born in 1950 or earlier are unaffected by this change and must take any RMDs due for 2022 and later years.

Designated Roth account assets in 401(k), 403(b), and governmental 457(b) plans will be exempt from pre-death RMD rules starting in 2024, but it's unclear whether participants can distribute these assets to satisfy their RMD.

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Withdrawals from a 457 plan are generally taxable.

Unlike other retirement accounts, the 10% penalty tax doesn't apply to distributions prior to age 59½. However, the penalty tax may apply to distributions of assets that were transferred to the 457(b) plan from other types of retirement accounts.

For detailed tax information, view the Special Tax Notice Regarding Plan Payments.

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For those who haven't kept up with the latest changes, the final regulations for 457 plan RMD rules largely track the 2022 proposed regulations. The key change is the applicable required beginning date for commencing payments, which depends on the participant's birthdate – age 70½, 72, 73, and 75.

Compliance with the final regulations is required beginning January 1, 2025, with a reasonable, good faith standard for prior years. Plan amendments are not required for most plans until December 31, 2026.

Plan sponsors can choose to retain the pre-SECURE age 70½ required beginning date, regardless of a participant's birth date. This option may be of interest for defined benefit plan sponsors, as the rule for actuarial adjustments for individuals older than age 70½ was not changed by SECURE.

Here are the possible required beginning dates for commencing payments:

Beneficiaries subject to the new 10-year rule must receive annual payments during the 10-year payment period. This rule will add significant complexity to the RMD process for defined contribution plans (and IRAs).