Closing a 457 Plan

The contribution limit for 457 plans for 2013 and 2014 set by the Internal Revenue Service is $17,500. Participating in this employer-based retirement plan has its advantages. Income tax is deferred until you choose to take out some, or all, of the money. You can choose to remove money from your 457 at retirement or when you leave your employer. Any funds that you take out of the 457 that are not rolled over into another retirement fund are subject to mandatory federal tax withholding. There is no early withdrawal fee.

If your circumstances dictate that your best move is to close your 457 retirement plan and receive a lump sum distribution, you can do so without incurring a federal tax withholding fee, no matter your age. Keep in mind, though, that a state withholding tax may apply. If the reason for closing out your plan is an unforeseen emergency, you can request a 457 Emergency Withdrawal Packet. You must fill out a form stating the nature of the emergency and how the funds will be used. You will be asked what percentage of withholding tax you prefer. You can request that no taxes be withheld at the time of distribution. However, you will be required to pay both the state and federal taxes applicable on your tax return for that current tax year.

The way you choose to take money from your 457 plan -- in payments or in one lump sum -- determines the penalties and taxes that are assessed on the tax-deferred savings. If you close your plan and take a one-time distribution of funds, you are not assessed a 10 percent federal penalty fee such as is applied to 401(k)s. But you are subject to a mandatory 20 percent tax withholding fee. A state penalty or tax may also apply, depending on where you live.

If you opt to make a full or partial withdrawal, you can roll over your 457 plan funds into another tax-deferred plan, such as a ROTH. If you change jobs, you can roll over the funds into your new company’s 457 plan. You can also have the money transferred to a 401(k), 403(b) or IRA. This will let you avoid the 20 percent federal tax.