A 457(b) plan is a retirement program for state, city or other government employees and workers of tax-exempt organizations under Internal Revenue Service code 501(c)3. They allow employers and employees to put up to $17,000 a year ($17,500 beginning in 2013) into a retirement account. Employee contributions and fund earnings are deferred from federal income taxes until money is withdrawn. There are some limits to withdrawals.
Basic Withdrawal Rules
The basic rules for withdrawing funds from a 457 involve when you retire, when you leave your job or when you have a qualified hardship emergency. Withdrawals at any time are subject to federal taxes as ordinary income, but there are no penalties for early withdrawals, unlike other retirement plans that impose a 10 percent early penalty.
The Internal Revenue Service defines a hardship as an unforeseeable emergency creating a severe financial situation that cannot be met with insurance or other resources. The amount of the withdrawal must be limited to the amount needed to resolve the emergency. Examples are potential foreclosure on a home, extreme medical expenses or funeral expenses. Buying a house or educational expenses do not qualify as emergencies.
There are two exceptions to the no-penalty provision for early withdrawals. Any non-457 funds that were rolled into the 457 account are subject to a 10 percent penalty if they are withdrawn before age 59 1/2. A rollover or shifting of funds into another retirement account may be subject to the penalty if the new plan is not a 457 or an individual retirement account unless there are special circumstances like a divorce.
You will pay taxes only on the money you receive. Any funds you leave in the 457 will continue to accumulate earnings tax-free, and you can make additional contributions after any partial withdrawal. Unless you make a total withdrawal when you leave the employer, you can elect how to take distributions so you can spread out any tax consequences.
- IRS: IRC 457(b) Deferred Compensation Plans
- IRS: Tax on Early Distributions From Retirement Plans, Other Than IRAs
- IRS: Retirement Plans FAQs Regarding Hardship Distributions
- Cornell University Law School: 457 — Deferred Compensation Plans of State and Local Governments and Tax-Exempt Organizations
- ICMA RC: 457 Withdrawal Information
- Nationwide: What Is a 457(b) Plan?