Can I Withdraw From My 457 While Still Working?

457 plans are a type of deferred compensation plan primarily offered to employees of state and local governments and certain non-profit organizations. These plans provide a savings vehicle, allowing participants to contribute on a pre-tax or Roth (after-tax) basis, with earnings growing tax-deferred until withdrawal. While access to these funds is generally restricted until separation from service, death, or disability, specific, limited circumstances exist that permit withdrawals even while still employed. This article will clarify the conditions for in-service withdrawals, their tax implications, and the process for requesting them.

Understanding 457 Withdrawal Eligibility

Funds held within a 457 plan typically become accessible upon certain life events, establishing the standard conditions for distribution. The most common triggers for distribution include separation from service (through retirement or termination), the participant’s death, or an unforeseeable disability. These events generally allow participants or their beneficiaries to begin receiving distributions. This framework ensures the plan serves its primary purpose of providing retirement income or financial support during significant life changes. The Internal Revenue Service (IRS) and individual plan documents also outline specific, limited exceptions for accessing funds before these general conditions are met.

Specific In-Service Withdrawal Circumstances

While 457 plans are designed for retirement savings, specific situations may allow participants to access funds before leaving employment. These in-service withdrawal provisions are limited and governed by IRS regulations and individual plan rules.

Unforeseeable Emergency

One primary category for in-service withdrawals is an unforeseeable emergency. The IRS defines this as a severe financial hardship resulting from an illness or accident of the participant, their spouse, or a dependent. It also includes loss of property due to casualty, such as uninsured home damage, or other extraordinary circumstances beyond the participant’s control.

Examples include medical expenses, costs to rebuild a home after a natural disaster, or imminent foreclosure or eviction. The amount withdrawn must be limited to what is reasonably necessary to satisfy the emergency, and the hardship cannot be relieved by other means like insurance, liquidating other assets without causing further severe hardship, or stopping plan deferrals.

Age-Based Withdrawal (Governmental Plans)

Governmental 457(b) plans, unlike those for tax-exempt organizations, may permit in-service withdrawals once a participant reaches age 59½. This allows greater flexibility for older employees who are still working, providing an option to use a portion of their savings while remaining employed. Not all governmental plans adopt this feature.

Small Account Balance Withdrawal

Another potential avenue for in-service access is a small account balance withdrawal. Some plans may allow participants to cash out a small account, typically less than $5,000, if they are still employed and have not made contributions for a certain period, often two years. This is usually a one-time provision for relatively small, inactive accounts.

In-Service Rollovers

Finally, some governmental 457(b) plans may permit in-service rollovers, though this is not a direct withdrawal for personal use. This allows participants to transfer funds to another eligible retirement plan, such as an IRA or a 401(k), even while still employed. This option can be beneficial for consolidating retirement accounts or accessing different investment opportunities; non-governmental 457(b) plans generally do not permit such rollovers.

Tax Implications of 457 Withdrawals

Understanding the tax consequences of 457 plan withdrawals is important, whether they occur in-service or after employment ends. All distributions from a 457 plan are generally subject to ordinary income tax in the year they are received. The withdrawn amount is added to your other taxable income and taxed at your marginal income tax rate.

A key distinction of 457(b) plans, particularly governmental ones, is their typical exemption from the 10% early withdrawal penalty. Unlike many other retirement accounts, withdrawals from a 457(b) plan are usually not subject to this additional penalty, even if the participant is under age 59½. This exemption generally applies only to funds originally contributed to the 457(b) plan; amounts rolled into a 457(b) from other retirement plans may still be subject to the 10% penalty if withdrawn before age 59½.

Federal income tax withholding is mandatory for most 457 plan distributions. For eligible rollover distributions, a 20% federal income tax withholding typically applies unless the payment is directly rolled over to another eligible plan. For other types of distributions, the withholding rate depends on the payment schedule and the participant’s tax elections. State and local income taxes may also apply to 457 plan withdrawals, depending on the participant’s state of residence and its tax laws. These taxes are generally withheld from the distribution amount.

Steps for Requesting a Withdrawal

Once eligibility for an in-service withdrawal has been determined and the tax implications are understood, the next step involves requesting funds. The process begins by contacting the specific 457 plan administrator, such as your human resources department, benefits office, or a third-party administrator. They can provide information on your plan’s specific rules and the necessary forms for a withdrawal request.

For certain withdrawals, especially those based on an unforeseeable emergency, specific documentation is required to substantiate the claim. This might include medical bills, repair estimates for property damage, eviction notices, or funeral expense statements. Providing complete and accurate documentation helps avoid processing delays.

After gathering the necessary information and documentation, complete and submit the required withdrawal forms. These forms often specify the type of withdrawal requested and the amount. Submission methods vary by plan, typically including online portals, mail, or fax. Keep a copy of all submitted forms and supporting documents for your records.

Upon submission, the plan administrator will review the request for compliance with plan rules and IRS guidelines. Processing times can vary but generally take several business days, sometimes longer depending on the complexity of the request and the administrator’s workload. Participants usually receive confirmation once the withdrawal has been processed, detailing the amount disbursed and any taxes withheld.