Understanding 457 B Plan Withdrawal Rules for Retirement

You can withdraw money from a 457(b) plan at any time, but you'll need to follow the plan's rules and tax implications.

There are no restrictions on withdrawals from a 457(b) plan, but you may be subject to income tax and a 10% penalty if you're under 59 1/2.

If you're 59 1/2 or older, you won't have to pay the 10% penalty, but you'll still need to pay income tax on your withdrawals.

It's worth noting that some plans may have their own rules or restrictions on withdrawals, so be sure to check your plan documents carefully.

A 457(b) plan is essentially a type of tax-advantaged retirement savings account offered by certain state and local governments and tax-exempt organizations.

These plans are typically available to employees like law enforcement officers, civil servants, and university workers.

You can set aside pre-tax dollars in a 457(b) plan, reducing your income, and invest the money for potential growth until you take withdrawals.

There are two types of 457(b) plans, each with different rules, so it's essential to understand the specifics of your employer's plan.

457 plans come in two main varieties: 457(b) and 457(f) plans. The 457(b) plan is the most common type and is generally available to all employees of a state or local government entity.

Eligible 457(b) plans are held in trust and have rollover privileges similar to those of a 401(k) or 403(b). This means you can take your money with you if you leave your employer.

Non-governmental organizations can offer eligible 457(b) plans to certain "highly compensated employees", but the assets are not held in trust. The rollover privileges are much more restricted in these cases.

Ineligible 457(f) plans are available only to highly compensated employees of non-governmental organizations, such as charities and private nonprofits. Contributions to a 457(f) are virtually unlimited, but the funds must be at a "substantial risk of forfeiture."

Contributions to a 457(b) retirement plan are limited, with a maximum of $23,000 allowed for 2024.

You can choose to contribute either your pay or the maximum amount, whichever is lower.

Employees 50 or older can also make an additional catch-up contribution of $7,500.

To be eligible for a 457 b plan, you'll need to meet some specific requirements.

Your total eligible earnings for the prior year must meet or exceed the plan's annual dollar threshold. For the 2025 plan year, this means earning at least $269,000 by December 31, 2024.

You can also attest that you're an "accredited investor" by meeting the criteria set forth in the USC 457(b) Salary Deferral Agreement.

To break down the eligibility requirements, here are the key details:

You can select the investment funds used to measure your account's investment experience from one of three provided investment companies: Fidelity Investments, TIAA, or Vanguard.

You can change your investment allocation at any time, but you'll need to contact the investment company directly for any changes within their regulations.

These changes can be made once you've established your 457(b) plan account.

You can find the available investment choices in the fund menu provided.

The 457(b) plan offers some unique benefits that set it apart from other retirement plans. You can withdraw from your 457(b) plan without penalty, regardless of your age, provided you meet distribution eligibility requirements.

One of the key benefits of the 457(b) plan is that it allows you to contribute up to a certain amount each year, with limits that vary depending on your age. For 2024, the annual contribution limit is $23,000 for participants under 50 and $30,500 for participants 50 and older.

You can also take advantage of special catch-up limits, which allow you to contribute up to twice the annual limit for three years before your normal retirement age. Alternatively, you can contribute the standard annual limit plus the amount of the standard limit not used in prior years.

In addition to these benefits, the 457(b) plan also offers a tax credit for voluntary contributions or elective deferrals. This is known as the Retirement Savings Contributions Credit, and the amount of the credit depends on your tax filing status and adjusted gross income.

Here are the annual contribution limits for 2024:

You can withdraw some or all of your funds from a 457(b) plan upon retirement, even if you're not yet 59½ years old, without a 10% penalty.

However, you'll still owe income tax on the amount you withdraw.

If you never take any money out of your 457(b) plan, you'll face a penalty for failing to take a required minimum distribution (RMD). This penalty is 50% of the portion not distributed, but it decreased to 25% starting in 2023 and can be reduced to 10% if the error is corrected promptly.

Withdrawals from a 457(b) plan are subject to income tax and wage tax, so you'll need to report them as taxable income on your tax return.

You should consider your options carefully before withdrawing from a 457(b) plan, as the default withdrawal is a lump sum that can significantly increase your tax liability.

If you qualify for an unforeseeable emergency distribution, you can withdraw funds early penalty-free while still being employed by the plan sponsor.

You must start taking RMDs from your 457(b) on April 1 following the calendar year you turn 73, unless you're still working for the plan sponsor.

Here's a summary of the RMD rules:

Note that this is not an exhaustive list, and you should consult with a financial advisor or tax professional for personalized advice.

Taxes are a crucial aspect of 457(b) plan withdrawals. Your deferrals (and investment earnings) are not subject to federal income tax until you receive payment from the plan.

When you do receive a payment of your benefit, the entire amount paid is taxed as ordinary income unless you transfer it to another employer’s non-governmental 457(b) plan. This means you'll owe income tax on the amount you withdraw.

You'll also get dinged if you never take any money out. Both governmental and non-governmental 457(b) plans fall under the IRS required minimum distribution (RMD) rule that says you must begin withdrawing a specified portion of the funds when you reach a certain age.

The penalty for failing to take a required minimum distribution is a 50% nondeductible excise tax on the portion not distributed, but it was decreased to 25% starting in 2023. If the error is corrected promptly, the penalty can be reduced to 10%.

Here are the key tax implications of 457(b) plan withdrawals:

You can roll over funds in your governmental 457(b) plan to a Roth IRA, 401(k), 403(b), or another 457 governmental plan. However, the rules for 457(b) plans at a private tax-exempt organization are much more restrictive.

You can roll over funds from a governmental 457(b) plan to another governmental 457(b) plan, but not to a private tax-exempt organization's 457(b) plan. On the other hand, funds in a private tax-exempt organization's 457(b) plan can only be rolled over into another non-governmental 457 plan.

Here are the rollover options for different types of 457 plans:

You may also transfer funds from one governmental 457(b) plan to another governmental 457(b) plan, but there is no option for transferring a 457(f) fund.

If you're lucky enough to work for a tax-exempt organization that offers both 403(b) and 457(b) plans, contributing to both can be a great way to boost your retirement savings.

You'll need to be aware of the differences in withdrawal, rollover, and transfer rules for each plan, especially if you've elected to contribute to both.

Contributing to both plans can help you increase your tax-advantaged retirement savings, which is a huge plus for your financial future.

403(b) plans are similar to 401(k)s, but they have some unique features.

You can withdraw funds from a 403(b) plan before age 59½, but you'll still owe income tax on any withdrawals.

Some 403(b) plans allow employees who have worked for the plan sponsor for 15 years or more to make additional contributions.

Beginning in 2025, the annual catch-up contribution limit for employees ages 60 to 63 will increase to the greater of $10,000 or 150% of the regular catch-up contribution.

403(b)s are subject to a 10% additional tax for early withdrawals, except for distributions attributable to a rollover from another type of plan or IRA.

If you're considering the USC Retirement Savings Program, you might be wondering about the difference between the 403(b) plan and the 457(b) plan. The 403(b) USC Retirement Savings Program is available to all faculty and administrative staff with eligible earnings, and it doesn't require a salary deferral agreement form to renew annually.

One key difference between the two plans is eligibility. To be eligible for the 457(b) plan, you must be at least 21 years old, have completed one year of service, and be working in an eligible job category. In contrast, the 403(b) plan has no age requirement and is available to all non-student employees except those eligible for the Keck Medicine of USC 401(k) Retirement Plan.

The 457(b) plan also has a more restrictive rollover policy, allowing transfers from other nongovernmental 457(b) plans only. On the other hand, the 403(b) plan allows rollovers to a new employer's 401(a), 401(k), 403(b), or governmental 457(b) plan.

Here's a summary of the key differences between the two plans:

The 457(b) plan has a four-year graded vesting schedule for university contributions, while the 403(b) plan has no vesting requirement. This means that the 457(b) plan's university contributions may take longer to fully vest, whereas the 403(b) plan's contributions are always 100% vested.

Receiving your benefits from a 457(b) plan is a significant milestone. You can elect to receive all or part of your deferral account when you terminate employment with the university for any reason, including disability or retirement.

The normal retirement age under this plan is 65, but you can begin receiving payments from this plan the following termination, even if you haven't reached the normal retirement age. Payment of benefits must begin no later than April 1 of the year in which you reach age 73 or, if later, April 1 of the year following the year in which you retire.

If you're under 50, the annual contributions to your 457(b) plan are capped at $23,000, while those 50 and older can contribute up to $30,500. However, if you're 50 or older, you may be eligible to contribute up to $46,000 in certain circumstances.

You can withdraw from a 457(b) plan without penalty, regardless of your age, as long as you meet the distribution eligibility requirements. However, keep in mind that a distribution from a deferred compensation plan may be subject to income tax assessments.

Here's a summary of the key facts to keep in mind:

When you're ready to withdraw from your 457(b) plan, you have several distribution options to consider.

The plan offers four distribution options, and it's essential to understand these choices to make an informed decision.

You can elect to receive a single lump-sum payment of the entire balance of your deferral account, with proper income tax withholding, directly from the investment company. This is the default option.

If you don't elect a distribution option by submitting a distribution election form within 60 days of termination, you'll receive your account balance on or about the 120th day after termination, as required by federal law.

This means your entire benefit is taxed as ordinary income for the year in which it is paid to you.

You may also elect to receive an annuity payable in equal installments for your lifetime that ends upon your death, or an annuity payable in equal installments for the joint lives of you and your beneficiary.

Alternatively, you can choose to receive payments for a fixed period of not less than one year and not more than 20 years.

Here are the four distribution options in a nutshell:

Keep in mind that federal tax laws limit the kinds of tax-advantaged plans that can accept rollovers from this plan, so be sure to review the specifics of your situation before making a decision.