Let’s face it: the business of retirement is complicated. We spend our entire careers salting away money only to discover rules we didn’t fully understand or know when it comes time to pay for retirement.
Make a mistake, and it may cost you a pretty penny. There are many potential pitfalls, including when withdrawing money from deferred income plans like a 457(b).
Related: How to plan 457(b) withdrawals in retirement with a pension
457(b) plans aren’t as common as other tax-advantaged plans, like 401(k) or 403(b) plans, but they are a valuable retirement savings tool offered by many government agencies and some non-profits.
A 457(b) allows workers to set aside pre-tax income that can grow tax-deferred. As a result, unless the plan has a Roth option, retirees will owe income taxes on any withdrawals. There can, although not often, also be withdrawal penalties.
There can be penalties and taxes due if you’re funding retirement with a 457(b) plan.
shutterstock_2381393109
Are there early withdrawal penalties on a 457(b)?
We recently reached out to a retirement expert to answer a reader’s question about planning withdrawals from a 457(b) plan when pension income is also present.
Her response prompted some questions and comments, including this one:
“After reading your article, How to plan 457(b) withdrawals in retirement with a pension, on retirement regarding 457(b) plans, I have a comment.
If you retire before 59½, you do not have to pay a penalty on your withdrawal. As a former payroll administrator for a state agency, this is why people defer into a 457(b) rather than having to wait on their 401(k), which has penalties for withdrawals before age 59½.”
Related: How to plan 457(b) withdrawals in retirement with a pension
457(b) early withdrawal penalties are uncommon, but can happen
You are technically right that distributions from a 457(b) plan are not subject to a 10% early distribution penalty, but that is true if all the amounts are attributed to 457(b) contributions, said Denise Appleby, CEO of Appleby Retirement Consulting and author of the “2025 IRA Quick Reference Guide.”
Remember too that in the question answered, the person stated they have assets in pension plans as well. Therefore, Appleby says “Mentioning the 10% penalty is a catch-all in the event the distributions are early (pre-59½) and made from a qualified pension plan.”
Related: Dave Ramsey warns Americans on Social Security, 401(k)s
According to Appleby, the 10% early distribution penalty is something to consider for a 457(b) plan if you rolled over assets from a non-457(b) plan, such as a 401(k), to your 457(b) plan:
Distributions from a governmental 457(b) plan are subject to the 10% early distribution penalty to the extent the amount is attributed to rollovers from an IRA or employer plan other than another 457(b) plan.
For this reason, it’s important for a participant to understand what money is being withdrawn from a 457(b) plan, so as to avoid unknowingly withdrawing funds subject to early distribution penalty, including rollovers from other plan types such as 401(k)s.
Typically, 457(b) plans make this easy by creating a sub-account for the amounts that were rolled over into them, allowing for easier tracking.
Appleby says there were other reasons to mention early distribution penalties in response to the individual’s question, including:
The person asking the question stated they have assets in pension plans as well. Therefore, the response covers pension plans. Mentioning the 10% penalty is a catch-all in the event the distributions are early (pre-59½) and are made from a qualified pension plan.
Since the person who asked the question is considering retirement, one can assume they are past age 59½. But that is not always the case, so we thought it best to at least have their financial adviser consider it, just in case,
Given that the person writing the original question didn’t provide detailed information, Appleby said the best approach was to provide a broad response that included the 10% early distribution penalty.
“You will notice that we emphasized consulting with an adviser,” said Appleby. “We do so because an adviser proficient in this area will ask probing questions that allow them to provide a response tailored to the client’s retirement savings.”
These questions include the following:
Have you ever rolled over any amount from another type of retirement plan to your 457(b) plan?What is your date of birth? Reason: to determine if the 10% penalty is a point of consideration.When do you plan to retire? To determine the age at which retirement might occur.
“The adviser should also obtain a copy of the account statement to verify the type of account, as I know from experience that non-professionals often misidentify account and plan types,” said Appleby.
Got questions about retirement? Email [email protected]
For more, read: Ask Bob – Retirement Daily on TheStreet
Related: Veteran fund manager unveils eye-popping S&P 500 forecast
