Understanding 457b Withdrawal Rules for Plan Holders

As a plan holder, it's essential to understand the 457b withdrawal rules to make informed decisions about your retirement savings. You can withdraw funds from your 457b plan after age 59 1/2 without penalty.

The IRS requires you to take required minimum distributions (RMDs) from your 457b plan starting at age 72. This means you'll need to take a certain amount of money out each year, or face a penalty.

If you leave your employer, you can take your 457b plan with you, but you'll need to roll it over to an IRA or another eligible retirement plan within 60 days to avoid taxes and penalties.

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457 plans are not classified as qualified plans, and they have different rules for rollovers and distributions compared to 401(k) and 403(b) plans.

Originally, 457 plans were only available to state and local government employees, entities, and 501(c)3 organizations, but now looser restrictions allow more employers to offer them.

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You can contribute to both a 457 plan and a Roth IRA if you qualify, which may help you save more money for retirement.

Before retirement or severance from employment, participants can take withdrawals from their 457(b) plan under certain circumstances.

A financial hardship caused by unforeseeable emergencies, such as disease or illness, accidents, property losses from natural disasters, funeral expenses, evictions or foreclosures, qualifies as a distributable event.

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Withdrawal rules can be complex, but I'll break it down for you. You can withdraw some or all of your funds from a 457(b) plan upon retirement, even if you're not yet 59½ years old, without incurring a 10% penalty.

However, you'll still owe income tax on the amount withdrawn. On the other hand, failing to take required minimum distributions (RMDs) can lead to a hefty penalty: a 50% nondeductible excise tax on the portion not distributed. This penalty was decreased to 25% starting in 2023, and it can be reduced to 10% if the error is corrected promptly.

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If you have a 457(f) plan at a private nonprofit, be prepared for a giant tax hit when you retire, as the entire amount in your account is considered taxable upon your separation from service. The assets will be distributed to you in a lump sum and will be subject to FICA, federal, and state taxes at that time.

Here are some emergency withdrawal scenarios that may qualify for a withdrawal from your 457(b) plan:

There are two main types of 457 plans: 457(b) or "eligible" plans and 457(f) or "ineligible" plans.

Eligible 457(b) plans are the most common type, available to all employees of a state or local government entity, and offer assets held in trust with rollover privileges similar to 401(k) or 403(b) plans.

Non-governmental organizations can also offer eligible 457(b) plans, but only to certain "highly compensated employees", and in that case, the assets are not held in trust.

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Ineligible 457(f) plans are available only to highly compensated employees of non-governmental organizations, such as charities and private nonprofits.

Contributions to a 457(f) plan are virtually unlimited, but the IRS requires that the funds be at a "substantial risk of forfeiture", meaning you could risk losing all of the money if you leave your employer before an agreed-upon date or before reaching normal retirement age.

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If you have a 457(b) plan, you can withdraw some or all of your funds upon retirement without incurring a 10% penalty, unlike most other types of plans. However, you'll still owe income tax on the amount you withdraw.

You'll need to begin withdrawing a specified portion of your funds when you reach a certain age, as per the IRS required minimum distribution (RMD) rule. Failing to take a required minimum distribution can result in a hefty penalty, which was reduced to 25% starting in 2023 and can be reduced to 10% if the error is corrected promptly.

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457(f) plans at private nonprofits are taxed differently, with the entire amount in your account considered taxable upon your separation from service. This can result in a significant tax hit when you retire.

If you have an emergency, such as foreclosure of your primary residence or funeral expenses, you may be able to make an emergency withdrawal from your 457(b) plan. Approval is not automatic and requires adequate documentation demonstrating your need for the withdrawal.

Here are some examples of emergencies that may qualify for an emergency withdrawal:

Withdrawals from 457 retirement plans are taxed as ordinary income, but distributions from a Roth 457 plan are not subject to tax withholding.

Withdrawals from a 457 plan can be taken at any time without an IRS premature withdrawal penalty. This is a key difference from other types of retirement accounts.

Withdrawals from a 457 plan are not considered earned income for Social Security purposes. This means that taking a withdrawal from a 457 plan won't affect your Social Security benefits.

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You can borrow up to 50% of your vested balance or up to $50,000 – whichever is less – from your 457(b) plan if it allows loans.

The minimum loan amount is $1,000. Some plans may have an exception to this limit if your vested balance is less than $10,000.

The maximum loan length is five years, unless the loan is for the purchase of a primary residence, in which case it can be up to 30 years.

Your employer sets the repayment schedule, which could be as frequent as weekly or as infrequent as quarterly.

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You can withdraw some or all of your 457(b) plan funds upon retirement, even if you're not yet 59½ years old, without incurring a 10% penalty. This is a relief, especially if you need access to your funds before the usual age.

The catch is that you'll still owe income tax on the amount you withdraw, so be prepared to pay taxes on your withdrawals. If you have a governmental 457(b) plan, you'll need to start taking required minimum distributions (RMDs) when you reach a certain age, or face a 50% nondeductible excise tax on the portion not distributed.

If you have a 457(f) plan at a private nonprofit, be prepared for a giant tax hit when you retire, as the entire amount in your account is considered taxable upon your separation from service.

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You can roll over funds in your governmental 457(b) plan to a Roth IRA, 401(k), 403(b), or another 457 governmental plan. This option is not available for non-governmental 457 plans, which can only be rolled over into another non-governmental 457 plan.

If you have a 457(b) plan through a private tax-exempt organization, your options are more limited. You can only roll over funds into another non-governmental 457 plan.

Rollovers are a great way to avoid taxes on your 457 withdrawal, as they are not taxable events. This is especially useful for governmental 457(b) plan participants, who can roll over their funds into other qualified plans.

Distributions from a Roth 457 plan are not subject to tax withholding, which means you won't have to worry about taxes when you withdraw your funds.

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If you're 50 or older, you're eligible for an additional $7,500 in catch-up contributions, bringing the maximum limit to $31,000.

You can contact the DRS at 800-547-6657 to determine if you're eligible for the Special Catch-up limit of $47,000, which is available to those nearing retirement.

A short video can provide more information about catch-up options if you're interested in learning more.

You can roll your beneficiary account funds into your IRA, but first, you'll need to contact the relevant party for guidance.

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If you're fortunate enough to work for a tax-exempt organization that offers both 403(b) and 457(b) plans, contributing to both can be a game-changer for your retirement savings.

You'll need to be aware of differences in withdrawal, rollover, and transfer rules between the two plans, especially if you've elected to contribute to both.

Contributing to both plans, if you can afford it, will significantly boost your tax-advantaged retirement savings.

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To be eligible for withdrawal from your account, you must be separated from DCP-covered employment. If you submit a withdrawal request while still employed, it will be held for up to 180 days until your employer provides a separation date.

One key difference between 457 plans and 401(k) and 403(b) plans is that you can take regular withdrawals from a 457 plan as soon as you retire, without penalty.

You don't have to wait until age 59½ to start taking distributions, which can be a big advantage if you need access to your funds sooner.

Unlike 401(k) and 403(b) plans, 457 plans don't apply the 10% early withdrawal penalty, even if you take distributions before age 59½.

You can also roll over your funds from a governmental 457(b) plan into a qualified retirement plan, such as an IRA, if you choose to do so.

A Roth 457 plan is available for governmental 457(b) plans, allowing you to contribute after taxes and pay no taxes on qualifying distributions when you withdraw the money.

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If you're a 403(b) plan holder, you might be able to contribute to both a 403(b) and a 457(b) plan at your job. Some tax-exempt organizations are qualified to offer both plans.

You'll need to be aware of the differences when it comes to withdrawing, rolling over, or transferring your funds if you're contributing to both plans. This is especially important if you've elected to contribute to both plans.

Contributing to both plans can help you increase your tax-advantaged retirement savings, which is a big plus.

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