457 Deferred Compensation Plan Withdrawals Explained

If you've been contributing to a 457 deferred compensation plan, you're likely curious about when and how you can withdraw your funds. You can start withdrawing from a 457 plan at age 59 1/2, or earlier if you leave your job or retire.

One common misconception about 457 plans is that you have to take the withdrawals as a lump sum. Fortunately, this isn't always the case. You can take withdrawals in installments, which can be a more manageable and tax-efficient option.

A 457 plan is designed to help you save for retirement, but you can use the funds for other purposes if needed.

A deferred compensation plan is a type of retirement plan designed for state and municipal workers, as well as employees of some tax-exempt organizations. It's also known as a 457 plan.

Contributions to a deferred compensation plan are made with pre-tax dollars, which means the money and any earnings accumulated are not taxed until withdrawal. This can be a significant advantage for those who participate.

Here are some key benefits of a deferred compensation plan:

It's worth noting that a deferred compensation plan is an IRC Section 457 plan, which is administered by the Washington State Department of Retirement Systems (DRS) in the case of the Deferred Compensation Program (DCP).

To be eligible for a 457 deferred compensation plan withdrawal, you typically need to have reached age 59 1/2 or separated from your employer.

You can enroll in a 457 plan through your employer, usually during open enrollment or when you're first hired.

The plan's eligibility requirements and enrollment process may vary depending on the specific plan and your employer's policies.

To be eligible for withdrawal from your account, you must be separated from DCP-covered employment. This means you can't submit a withdrawal request while still employed.

If you do submit a request while employed, it will be held for up to 180 days until we receive a separation date from your employer.

Reenrolling in DCP is a straightforward process. If you leave employment and later return to a DCP-covered employer, you can easily resume your DCP contributions.

You have a 90-day window to make this decision. If you choose to reenroll within this time frame, you can withdraw your contributions from DCP.

Your contributions are not eligible for a rollover as long as you're actively employed.

Contributions to your 457 deferred compensation plan can be made through payroll deductions, and the minimum contribution per pay period is $10. You can contribute up to 100% of your compensation after required deductions.

You can adjust your contribution amount at any time by calling the HELPLINE or accessing your account online. However, changes may not take effect for up to two payroll periods due to administrative timeframes. Your deferral rate will remain the same until you inform the Plan.

You can withdraw your contributions if you meet certain conditions, such as having a Plan account balance of less than $5,000 and not contributing to the Plan in the last two years. If you meet these conditions, you can withdraw your contributions without penalty.

Here are some key details about contributions and investments:

Contributions to a 457(b) retirement plan have limits. For 2024, employees can contribute the maximum of either their pay or $23,000.

Employees who are 50 or older may make an additional catch-up contribution of $7,500.

You can contribute to your 457(b) retirement plan, but there are limits. For 2024, employees can contribute the maximum of either their pay or $23,000.

If you're 50 or older, you can contribute an additional $7,500 as a catch-up contribution. This can really add up over time, especially if you're able to contribute the maximum amount each year.

The minimum you can contribute per pay period is $10, and you can contribute up to 100% of your compensation after any required salary deductions.

You can also increase, decrease, or suspend your contributions at any time by calling the HELPLINE or accessing your account online. However, changes may not take effect for up to two payroll periods.

If you want your deferrals taken more evenly throughout the year, you should adjust your deferral percentage by calling the HELPLINE or accessing your account online. Otherwise, your deferral rate will remain the same and payroll deductions will be automatically stopped when you reach your maximum contribution level.

Here are some specific contribution limits and requirements:

Keep in mind that you may withdraw your contributions if you meet certain conditions, such as having a Plan account balance of less than $5,000, not having contributed to the Plan in the last two years, and not having used this Plan provision before.

If you have a governmental or non-governmental 457(b) plan, you can withdraw some or all of your funds upon retirement without a 10% penalty for early withdrawals. However, you will owe income tax on the amount you withdraw.

You'll need to start taking required minimum distributions (RMDs) at a certain age, which is 73 if you were born between 1951 and 1959, or 75 if you were born in 1960 or after. Failing to take RMDs can result in a hefty penalty of up to 50% of the portion not distributed, although this was decreased to 25% starting in 2023.

If you have a 457(f) plan at a private nonprofit, be prepared for a giant tax hit when you retire, as the entire amount in your account is considered taxable upon your separation from service.

You can withdraw some or all of your funds from a 457 plan upon retirement, even if you're not yet 59½ years old. There's no 10% penalty for early withdrawals, but you'll still owe income tax on the amount you withdraw.

If you have a governmental or non-governmental 457(b) plan, you can withdraw some or all of your funds upon retirement. You'll owe income tax on the amount you withdraw, but there's no 10% penalty for early withdrawals.

You can withdraw funds from a 457 plan in a lump sum, annual installments, or as an annuity. If you have a 457(f) plan at a private nonprofit, be prepared for a giant tax hit when you retire. The entire amount in your account is considered taxable upon your separation from service.

The IRS requires 457(b) participants to take a required minimum distribution at age 73 if they were born between 1951 and 1959 or 75 if they were born in 1960 or after.

Here are some withdrawal options:

Emergency Withdrawals

You can withdraw funds from a 457 plan in the event of an unforeseeable emergency. The criteria for an unforeseeable emergency is set by the IRS, and any distributions must adhere to these rules. For example, credit card debt is not a qualified unforeseeable emergency, even if the card was used to pay for a medical emergency.

To request an emergency withdrawal, you can apply online, by phone, or in person. You'll need to gather documentation to support your claim, such as copies of bills, invoices, and quotes.

Here are the steps to request an emergency withdrawal:

1. Apply online: Log in to your 457 plan account and select Loans & Withdrawals.

2. Apply by phone: Contact the DRS record keeper, Voya Financial, at 888-327-5596.

3. Gather documentation: Collect copies of bills, invoices, and quotes to support your claim.

Note that if the DRS record keeper denies your request for distribution, you can request further review by DRS.

Having a clear understanding of your beneficiaries is crucial when it comes to withdrawal options. You can name anyone as your beneficiary, including a spouse, child, domestic partner, friend, neighbor, or even a charity or trust.

If you die without a current beneficiary designation on file, a distribution will be made to your estate. This can be a lengthy and complicated process, so it's essential to keep your beneficiaries up to date.

You can designate a beneficiary for your DCP account separately from any other plan or program, like a pension. This means you can have different beneficiaries for different accounts, which is a good thing to keep in mind.

Your spouse has the same withdrawal options as the participant did, including leaving the money in the account, withdrawing in full, or withdrawing it in payments.

If you have a governmental 457(b) plan, you can roll over your funds into other qualified plans without incurring a taxable event, except into a Roth IRA.

Roth 457 plans, on the other hand, are not subject to tax withholding, meaning you won't have to pay taxes upfront on withdrawals.

Both governmental and non-governmental 457(b) plans are subject to the IRS required minimum distribution (RMD) rule, which requires you to start withdrawing a specified portion of the funds when you reach a certain age.

Failing to take a required minimum distribution can result in a hefty penalty, which was decreased to 25% starting in 2023, and can be reduced to 10% if the error is corrected promptly.

If you have a 457(f) plan at a private nonprofit, be prepared for a giant tax hit when you retire, as the entire amount in your account is considered taxable upon your separation from service.

A 457 withdrawal is taxed as ordinary income, and you won't face any IRS premature withdrawal penalties.

You won't have to worry about a 10% penalty for early withdrawals, but you will owe income tax on the amount you withdraw.

Distributions from a 457 plan are not considered earned income, so they won't affect your Social Security payments.

Both governmental and non-governmental 457(b) plans are subject to the IRS required minimum distribution (RMD) rule, which means you'll have to start withdrawing a specified portion of the funds at a certain age.

Failing to take a required minimum distribution can result in a hefty penalty, but it's been reduced to 25% starting in 2023, and can be reduced to 10% if the error is corrected promptly.

The entire amount in your account is considered taxable upon your separation from service if you have a 457(f) plan at a private nonprofit.

You can expect a giant tax hit when you retire with a 457(f) plan, and the assets will be distributed to you in a lump sum, subject to FICA, federal, and state taxes.

If you're looking to minimize tax on withdrawals, consider rolling over your funds into another qualified plan. This is a tax-free event, and it's available to governmental 457(b) plan participants.

Distributions from a Roth 457 plan are not subject to tax withholding, so you can avoid some taxes upfront.

457 plans have some unique features that set them apart from other retirement plans. They're not classified as qualified plans, so they're not bound by the same rules as 401(k) and 403(b) plans.

You can contribute to both a 457 plan and a Roth IRA, making it possible to save more money for retirement. This is a great option if you qualify for a 457 plan.

A financial hardship caused by unforeseen events like disease, illness, or natural disasters can qualify you for a withdrawal from your 457(b) plan. This can be a big relief if you're facing an emergency.

The IRS requires 457(b) participants to take a required minimum distribution at age 73 if they were born between 1951 and 1959, or age 75 if they were born in 1960 or after.

One key difference between 457 plans and 401(k) and 403(b) plans is that participants can take regular withdrawals from 457 plans as soon as they retire, regardless of their age.

Unlike 401(k) and 403(b) plans, 457 plans do not have a 10% early withdrawal penalty.

Another difference is that participants with a governmental 457(b) plan may roll over their funds into a qualified retirement plan, such as an IRA.

In contrast to 401(k) and 403(b) plans, 457 plans are not classified as qualified plans, and they are not bound by the same rollover and distribution rules.

You can contribute to both a 457 plan and a Roth IRA, which may allow you to save more money for retirement than if you only invested in one account.

One key difference between 457(b) and 401(k) plans is the application of the additional 10% early withdrawal tax.

A 457(b) plan differs from a 401(k) plan in this regard.

This difference can have significant implications for plan participants.

You can receive payments from a 457 deferred compensation plan in a lump sum or through monthly payments. Lump sum payments can be made at any time, but monthly payments require a minimum of 30 days' notice.

The age requirement for receiving payments varies depending on the plan, but some plans allow participants to start receiving payments as early as age 59 1/2. Others may require participants to reach age 65 or later.

You can take a penalty-free withdrawal from a 457 plan if you leave your employer or retire. This is because 457 plans are exempt from the 10% penalty that applies to other types of retirement accounts.