Everyone needs a retirement nest egg. It can be exciting to watch the balances in your retirement accounts grow year after year, but it also can be frustrating if you need that money before you reach retirement age. Generally, there are penalties imposed for withdrawing money early from tax-deferred retirement accounts; however, those penalties don't apply to 457(b) plans.
Deferred Compensation Accounts
A 457(b) plan is a deferred compensation plan established by a state government or other tax-exempt employer. If you work for a state agency, or if you're considered a manager or highly compensated employee of an eligible tax-exempt organization, you may be able to defer part of your income from tax by depositing it in a 457(b) account. You can invest your deferred income in stocks, bonds and other securities. If you participate in the plan, your 457(b) account contributions and earnings are excluded from your taxable income until you withdraw them.
Federal law regulates withdrawals from your 457(b) account. In general, you can withdraw money when you reach age 70 1/2 or when you leave your job, no matter how old you are. However, there is an exception to the general rule. You may also be allowed to withdraw money from your 457(b) account to pay expenses related to an unforeseeable emergency. The circumstances that qualify as an "unforeseeable emergency" for the purpose of a 457(b) plan withdrawal are narrowly defined and fact-specific.
You may withdraw money from your 457(b) plan without leaving your job if you have an unforeseeable emergency. For example, if a sudden accident or illness involving you or one of your dependents causes you a severe financial hardship, or if you lose your property through casualty or because of an extraordinary, unforeseeable event, you may make an emergency withdrawal. If your loss is covered by insurance or if you can cover the loss yourself by cutting off your 457(b) income deferrals or liquidating some of your assets, you can't make an emergency withdrawal. Sending your kid to college, buying a home and paying off credit card debt aren't considered emergencies, but, for example, repairing uninsured water damage to your primary residence is.
Exception for Deemed Roth Accounts
Since 2011, eligible 457(b) employers have been allowed to let employees defer after-tax 457(b) income into accounts deemed Roth IRAs and to roll over 457(b) funds into designated Roth accounts. Withdrawals from in-plan rollovers carry the same restrictions as 457(b) accounts; i.e., you can't withdraw money from them unless you leave your job, reach the age of 70 1/2 or have an unforeseen emergency. However, after-tax deferrals you make into a deemed Roth IRA are governed by Roth IRA rules, not 457(b) rules. You can generally withdraw your after-tax contributions -- but not earnings on those contributions -- from a Roth IRA without paying taxes or penalties.
- Internal Revenue Service: IRC 457(b) Deferred Compensation Plans
- Internal Revenue Service: Section 457 Deferred Compensation Plans of State and Local Government and Tax-Exempt Employers
- Internal Revenue Service: Unforseeable Emergency Distributions from 457(b) Plans
- NAGDCA.org: New Law Allows Governmental 457(b) Plans to Offer Roth Accounts
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