457b Loan Repayment and Separation from Service

A 457b loan can be a lifesaver, especially if you're facing a financial emergency or need to pay off high-interest debt. You can borrow up to 50% of your 457b account balance, but the loan amount is capped at $50,000.

The loan repayment terms are relatively straightforward: you'll need to repay the loan, plus interest, within a certain timeframe, which is typically 5 years. However, you can repay the loan at any time without incurring penalties.

If you're facing a financial emergency, you can borrow from your 457b account to cover expenses. But remember, you'll need to repay the loan, and the interest will be charged to your account balance.

Worth a look: Is a 457 Plan an Ira for Tax Purposes

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

It's typically available to employees like law enforcement officers, civil servants, and university workers. They can set aside pre-tax dollars in the account, reducing their income.

Money in the account can be invested and potentially grow until withdrawals are made, at which point taxes are paid on what's taken out.

There are two types of 457 plans, each with different rules.

The CARES Act has made significant changes to 457 Plan loans. The maximum loan amount has been increased to $100,000, up from $50,000.

During the COVID-19 pandemic, the CARES Act allowed loans of 100% of the present value of the participant's account, up from 50%. This is a huge relief for many individuals who may be struggling financially.

Loans taken out from a 457 Plan or 401(k) Plan can have their due date extended if they are outstanding during the period of March 27, 2020 - December 31, 2020. This can provide much-needed breathing room for those who need it.

You can contribute up to $23,000 to a 457(b) plan in 2024 if you're under 50. This is the same employee contribution limit as a 401(k) plan.

Contributions are tax-deferred, meaning you won't pay taxes on them until you withdraw the money at retirement.

The catch-up provision allows workers aged 50 and up to contribute an additional $7,500 each year.

457(b) plans may offer both pre-tax and after-tax Roth versions.

In a pre-tax 457(b) plan, you contribute money and take a tax deduction today, but you'll pay taxes when you take the money out at retirement.

Taking a loan from your 457(b) plan can have both benefits and drawbacks. If you repay the loan in full by the end of its term, you won't have to pay taxes on it.

However, if you leave your job before the loan is repaid, you have three options: pay it in full, continue making post-separation payments, or pay applicable tax on the outstanding balance.

It's also essential to consider the interest you pay on the loan, which might be more or less than the interest you'd earn if you left the funds in your account.

Reducing your contributions to take a loan can also impact your overall savings in the plan.

Defaulting on the loan can lead to tax consequences and even restrict you from taking future loans.

Withdrawal rules for 457(b) plans can be complex, but it's essential to understand them before tapping into your account. Withdrawals are subject to income tax and wage tax, making them taxable income on your tax return.

You can withdraw funds at any time penalty-free if you're no longer employed by the plan sponsor or if the plan sponsor stops offering the plan. However, this can significantly increase your tax liability, so it's crucial to consider your options carefully.

You might qualify for an unforeseeable emergency distribution, which allows you to withdraw funds early penalty-free while still being employed by the plan sponsor. These distributions are typically allowed for events beyond your control, such as an illness, accident, or natural disaster.

Required minimum distributions (RMDs) must be taken from your 457(b) on April 1 following the calendar year you turn 73, unless you're still working for the plan sponsor.

If you separate from City service, you have three options for managing your loan. You can continue making loan repayments, which will be automatically converted from bi-weekly to monthly payments.

To make monthly payments, you can use a cashier's check, money order, or personal check. You will also receive a notification from Voya for an option to have your loan payments deducted from your checking or savings account.

You can also pay your loan in full by logging in to your DCP account or completing a Loan Payment Request Form and sending your payment as directed.

If you choose to stop making loan payments, your outstanding loan balance will be treated as a full distribution. This is a taxable event, and a 1099 tax form will be issued so you can report the distribution as taxable income.

You are still eligible to apply for new loans after separating from City service. However, keep in mind that you can also make taxable distributions from your account after you separate.

Taking a loan from your 457(b) plan can be a viable option, but it's essential to understand the terms and conditions.

The minimum loan amount available is $2,500, and the maximum loan amount is the lesser of one-half of the account value or $50,000, reduced by the highest outstanding balance of loans from all qualified employer plans.

Before applying for a loan, consider your financial situation and the potential impact on your retirement savings. Taking a loan can affect your future account balance.

You can calculate loan projections online or through KeyTalk to estimate your loan repayment amount. However, these projections won't take into account any outstanding pension or TDA loans.

A loan origination fee of $50 and a quarterly maintenance fee of $8.75 will be deducted from your account.

To apply for a loan, you'll need to complete a Loan Application and submit it to the Plan's Administrative Office. You can download the Plan's Loan Guide for additional information and an application.

Here are the key considerations when taking a loan:

If you're considering taking a 457(b) loan, there are some key principles to keep in mind. A 457(b) loan does not have tax consequences so long as it's repaid in full by the end of its term.

Taking a 457(b) loan can be a flexible option, but it's essential to understand the rules. If you leave city employment before the loan is repaid, you can either pay it in full, continue post-separation loan payments, or pay applicable tax on the outstanding balance.

Here are some takeaways to consider:

Defaulting on a 457(b) loan can have consequences. If you default, you will have to pay applicable tax on the defaulted amount and you could be restricted from taking future loans.

A 457(b) plan offers many advantages, including tax-deferred growth of your savings. However, employer matches for 457(b) plans are rare, and fees for 457(b) plans may be higher than other retirement plans.