IRC 457 Early Withdrawal Guidelines

There are ways to cash out a 457(b) plan before retirement.

There are ways to cash out a 457(b) plan before retirement.

A Section 457 plan, sometimes called a 457(b) plan, is a type of retirement plan offered to some government employees and nonprofit workers. You generally can't withdraw funds from a 457 plan before retirement age while you're still employed by the same employer, but there are opportunities for cashing out a 457 plan early if you have an unexpected emergency or leave the job.

How 457 Plans Work

A 457 plan is set up by a state or local government or a nonprofit organization. It allows employers or employees to contribute to the plan, similar to other retirement accounts like a 401(k) or IRA. As with those plans, you don't pay tax on money put into the plan or what it earns until the funds are withdrawn.

Plans can also offer Roth accounts, similar to Roth IRA plans, where you pay tax on your funds before putting them into the 457 account. When you withdraw the funds and whatever earnings you've accumulated at retirement, you don't pay tax on the original funds or even on your earnings. These can be useful for people who expect to be in a higher tax bracket when they retire than when they're working.

Unlike other retirement plans, you can often withdraw funds from a 457 plan when you leave your employer without penalty. On the other hand, the funds technically belong to the employer until you withdraw them, and in some cases they can be lost to other creditors of your employer in a lawsuit.

Different companies offer 457 plans on behalf of employers. For example, Nationwide offers Nationwide deferred compensation plans that are used by some government employers, with a Nationwide deferred comp withdrawal from your paycheck set up in accordance with your wishes and plan terms. Contact your employer or plan administrator to see what types of plans are available to you.

Cashing Out a 457 Plan Early

If you're still working for the employer that set up the plan, you can't simply cash out a 457 plan when you wish. This is different from an IRA or 401(k) plan, where you can often cash out the account as long as you pay owed taxes plus a penalty to the IRS.

If you have an emergency, you may be able to withdraw funds from the plan. Emergencies can include damage to your property, medical emergencies, funeral costs for a close relative or similar expenses. If you need the money to avoid being evicted from your home or having it go into foreclosure, this can be a qualifying emergency.

On the other hand, you can't take an emergency distribution simply to pay off accumulated debts, even if they present a hardship to you. Talk to your employer or plan administrator if you think you may have a qualifying emergency. You may have to provide documentation that you can't meet your expenses any other way.

You're also not allowed to borrow funds from a 457 plan under IRS rules, unlike various other retirement plans. In some cases, you may be able to withdraw some or all of your account balance if you have less than $5,000 in the account under rules allowing "de minimis" distributions. There's no tax penalty for doing so.

Leaving Work and Turning 70

You are generally allowed to take withdrawals from a 457 plan once you reach age 70 ½ or leave the job where you signed up for the plan. Unlike a 401(k) or IRA, there's no tax penalty for taking the money when you leave a job, but you are required to pay whatever tax you owe on the income.

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About the Author

Steven Melendez is an independent journalist with a background in technology and business. He has written for a variety of business publications including Fast Company, the Wall Street Journal, Innovation Leader and Ad Age. He was awarded the Knight Foundation scholarship to Northwestern University's Medill School of Journalism.

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