Can I Withdraw From My 457 While Still Employed?

A 457 plan is a type of deferred compensation retirement plan primarily offered to state and local government employees, as well as some tax-exempt organizations. These plans allow participants to contribute a portion of their salary on a pre-tax basis, with funds growing tax-deferred until withdrawal. While typically designed for retirement, individuals may need to access these funds while still employed. This article will explain the conditions, tax implications, and procedural steps involved in requesting them.

Conditions for In-Service Withdrawals

Accessing funds from a 457 plan while still employed is generally restricted to specific circumstances outlined in the plan document and Internal Revenue Service (IRS) regulations. One common condition is an “unforeseeable emergency,” a narrowly defined term requiring a severe financial hardship resulting from events beyond the participant’s control. Examples include a sudden and unexpected illness or accident affecting the participant, their spouse, or a dependent, leading to non-elective medical or dental expenses not covered by insurance.

Other qualifying events include property loss due to a casualty not covered by homeowner’s insurance, imminent foreclosure or eviction from a primary residence, or funeral expenses for a spouse, dependent, or non-dependent child. A distribution for an unforeseeable emergency must be limited to the amount reasonably necessary to satisfy the hardship, which may include amounts needed to cover federal, state, or local income taxes on the distribution.

Circumstances that do not qualify as an unforeseeable emergency include elective medical procedures, educational expenses, home or automobile purchases, or payment of ordinary bills. The emergency cannot be relieved through other means, such as insurance reimbursement, liquidation of other assets (unless such liquidation would itself cause severe financial hardship), or by stopping plan deferrals. Each request is evaluated based on the specific facts and circumstances.

Governmental 457(b) plans may also permit in-service withdrawals upon reaching age 59½. This age was lowered from 70½ to align with other retirement plans. However, the specific plan document must be amended to allow for this. This age-based withdrawal is distinct from an unforeseeable emergency and offers more flexibility if the plan permits it.

Some plans may also allow for small account balance withdrawals while still employed, provided no contributions have been made for a certain period and the account balance is below a specific threshold. The availability of this option depends on the specific provisions of the employer’s 457 plan document. Review the summary plan description or contact the plan administrator for eligibility.

Taxation of 457 Withdrawals

Funds withdrawn from a 457 plan while still employed are generally subject to income tax. If contributions were made on a pre-tax basis, the entire withdrawal amount is taxable as ordinary income. For governmental 457(b) plans, there is an absence of the 10% early withdrawal penalty, regardless of the participant’s age. This is a key distinction from other retirement accounts like 401(k)s or 403(b)s.

This penalty exemption generally applies to core 457(b) assets. However, funds rolled into a 457(b) from other retirement accounts (e.g., 401(k), 403(b), or IRA) may still be subject to the 10% early withdrawal penalty if distributed before age 59½. Distributions from a Roth 457(b) plan, where contributions are made with after-tax dollars, are generally tax-free upon withdrawal if certain conditions are met.

Federal income tax withholding applies to most taxable distributions from a 457 plan. For eligible rollover distributions, a mandatory 20% federal income tax withholding is generally required unless directly rolled over. State income taxes may also apply. Participants should consult their state’s tax regulations or a tax advisor to understand their full tax liability.

Process for Requesting a Withdrawal

Initiating an in-service withdrawal from a 457 plan involves identifying the plan administrator or recordkeeper. This entity manages the plan and is the primary contact for all withdrawal requests, providing specific forms and instructions.

To request a withdrawal, participants typically complete a specific withdrawal request form. For unforeseeable emergency withdrawals, this form requires detailed information, including the reason, amount, and supporting documentation to substantiate the emergency, such as medical bills or eviction notices. The requested amount should not exceed what is reasonably necessary to address the financial hardship.

Once completed, the form and all necessary supporting documents must be submitted to the plan administrator. Some administrators may require the employer’s signature to confirm eligibility. It is advisable to keep a copy of all submitted forms and documentation for personal records.

After submission, the plan administrator reviews the request for compliance with plan provisions and IRS regulations. This review process can take several business days. Funds are then disbursed, which may include a direct deposit or a mailed check. The approved amount might be adjusted based on the documentation and applicable tax withholding.