State and local governments, in addition to other non-governmental, non-profit organizations, can offer 457 plans to help you save for retirement. In many ways, 457 plans function much like the 401(k) plans offered by many companies. As is the case with 401(k) plans, you're limited from accessing your money except in certain circumstances. When you do take a distribution from a 457 plan, you'll usually owe income taxes on the distribution.
TL;DR (Too Long; Didn't Read)
You may withdraw money from your 457 plan when you retire or leave your job and possibly when you experience financial hardship. You'll have to make mandatory withdrawals after age 70 ½, and your beneficiary can withdraw money from the plan upon your death.
Severance From Employment
When you retire or leave your job for any reason, you're permitted to make withdrawals from your 457 plan. Unlike other tax-deferred retirement plans such as IRAs or 401(k)s, you won't face a 10 percent early distribution penalty, even if you're under age 59 ½ . For example, if you take a $15,000 distribution, you'll owe income tax on the distribution, but you won't have to pay an extra $1,500 early withdrawal penalty as you would with a 401(k) or IRA.
One option upon distribution is to roll your money over into another tax-deferred retirement account. This will allow you to maintain the tax-sheltered growth while avoiding taxes on the distribution.
Financial Hardship Withdrawals
The IRS permits 457 plans to allow hardship distributions for participants who face an unforeseeable financial emergency. Examples include illnesses or accidents, property loss caused by things like natural disasters, imminent foreclosure or funeral expenses. However, no plan is required to offer financial hardship distributions. Check your plan documents to see which of these "unforeseeable emergencies" qualify in your specific 457 plan.
Taking Mandatory Distributions
Most employer-sponsored retirement plans, including 457 plans, require mandatory distributions after you reach age 70 ½. Distributions must begin no later than April 1 of the year after you turn 70 ½ . As with any other type of 457 plan distribution, required minimum distributions are taxable. You cannot roll them over into another tax-deferred account.
The amount of your required minimum distribution is calculated annually based on your account value as of December 31 of the previous year and your age at the end of the year.
Death of the Account Holder
If you have a 457 plan and you die, your beneficiary can take distributions from the plan immediately. Beneficiary distributions avoid the early withdrawal penalty of 10 percent, regardless of the age of the beneficiary. However, distributions are still taxed as ordinary income. Beneficiaries can avoid taxation by rolling over the 457 distribution to a qualified retirement account of their own.
- IRS: IRC 457(b) Deferred Compensation Plans
- Investor.gov: 403(b) and 457(b) Plans
- IRS: Unforseeable Emergency Distributions From 457(b) Plans
- IRS: Retirement Plan and IRA Required Minimum Distributions FAQs
- IRS: Retirement Topics - Exceptions to Tax on Early Distributions
- Washington State Department of Retirement Systems: Beneficiary Distribution Request
John Csiszar served as a financial adviser for over 18 years, both for a global wirehouse and at his own investment advisory firm, earning a Certified Financial Planner designation along the way. He now works as a writing and editing contractor for private clients, with thousands of online articles to his credit, along with five educational books written for young adults.