Employees of governments and some nonprofit organizations can save for retirement with 457 plans. Named after Internal Revenue Code Section 457(b), a 457 plan is a tax-deferred retirement account. The rules for distributions from 457 plans after retirement are similar to retirement arrangements such as 401(k) and 403(b) plans, although there are some significant exceptions.
Deferred Account Status
A 457(b) plan is a retirement account for employees of state and local governments and agencies. Tax-exempt 501(c) organizations such as charities and hospitals can also set up 457(b) plans. Contributions up to $17,500 in 2013 are made through pre-tax salary reductions. Earnings are also tax-deferred while in the plan. Normally you can’t withdraw money from a 457(b) until you leave the job or retire. However, the Internal Revenue Service allows distributions for unforeseeable emergencies such as medical expenses, the funeral of a family member, or to replace or repair property damage due to accidents or natural disasters.
Once you retire or if you leave your job before retirement, you can withdraw part or all of the funds in your 457(b) plan. All money you take out of the account is taxable as ordinary income in the year it is removed. This increase in taxable income may result in some of your Social Security taxes becoming taxable.
Withdrawal Penalty Rules
Unlike retirement accounts such as 401(k) and 403(b) plans, the statutory 59 1/2 minimum age for making withdrawals does not apply. For this reason, if you retire before you reach the minimum age and begin pulling money from your 457(b) account, there is no penalty tax. There is one exception: If you have rolled over funds from another retirement plan that does impose the penalty tax, it will apply to all funds attributable to the rollover.
Required Minimum Distributions
A 457(b) is subject to IRS rules mandating required minimum distributions. At age 70 1/2, you must begin RMD withdrawals. The amount you have to take out each year depends on the balance remaining in your account and your life expectancy. If you do not remove the minimum amount, the portion not taken out becomes taxable and you have to pay a 50 percent penalty tax in addition.