What Are the Conditions Under Which a Withdrawal Can Be Made From a 457 Retirement Account?

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A 457 retirement plan is a deferred compensation plan available only to state and municipal workers and employees of certain tax exempt organizations. These plans are very similar to 401k plans in the private sector in that employee contributions are pre-tax and investments within the plan grow tax-deferred. One major difference is that the IRS does not impose a 10 percent penalty on withdrawals prior to your reaching age 59 1/2.

Contribution Limits

At the time of publication, the annual contribution limit for 457 plans equals 100 percent of your compensation or $16,500, whichever is lower. Annual catch-up contributions of an additional $5,500 are allowed once the plan participant reaches age 50. While these are the same as 401k contribution limits, the 457 plan allows for even higher contributions in the three years immediately preceding your normal retirement age under the plan.At that point you can make up to double the normal contribution limit, or $33,000 annually.

Employers may match your deferral contributions to the plan though they are not obligated to do so. Matching contributions to the plan cannot exceed the maximum contribution limits when combined with your own contributions.

Benefit

A 457 plan has liberal distribution rules. The IRS does not restrict distributions by age in a 457 plan. You may withdraw money from your 457 plan whenever you want, as long as it complies with the terms of the plan, which are set by the plan administrator. In addition, unlike a 401k, should you decide to roll your plan balance into any other plan upon leaving your employer, even an IRA, your employer will not withhold taxes.

Disadvantage

A 457 plan does not have to allow you access to loans or withdrawals at any set time. You must apply for retirement benefits and be approved by the plan administrator. Your administrator sets the terms for your retirement instead of the IRS in this respect. In addition to this, being able to retire early comes with a major drawback: you get less monthly income from your retirement nest egg. While retiring early may seem advantageous, you ultimately pay for it by having less money to spend as you get older. As inflation decreases the value of that savings, you may find that your income is insufficient to meet your expenses.

Consideration

Employees eligible for 457 plans should consider making the maximum contribution available, particularly in plans with liberal withdrawal and loan policies, since your assets will be available for emergencies. At the same time, as with all retirement plans, the main purpose is to save for the years when you are no longer working. Taking distributions from your 457, therefore, should be seen as a last resort.

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