Do 457 Plans Have RMDs? Rules and Exceptions

A 457 plan is a type of non-qualified deferred compensation plan available to employees of state and local governments, as well as certain tax-exempt organizations. These plans allow participants to defer a portion of their income, with the goal of saving for retirement. A common concern for individuals approaching retirement is understanding Required Minimum Distributions (RMDs), which are amounts retirement account holders must begin withdrawing annually once they reach a certain age. This article clarifies how RMD rules apply to 457 plans and addresses common distribution questions.

Understanding 457 Plans

Two types of 457 plans exist: governmental 457(b) and non-governmental 457(b). Governmental 457(b) plans are sponsored by state and local governments, including public school systems and universities. These plans typically allow eligible employees to make pre-tax contributions through payroll deferrals, which then grow tax-deferred until withdrawal.

Non-governmental 457(b) plans, also called tax-exempt 457(b) plans, are offered by certain non-governmental tax-exempt organizations. Similar to governmental plans, participants contribute pre-tax dollars, and earnings accumulate tax-deferred. Both types of 457(b) plans differ from other common retirement vehicles like 401(k)s or 403(b)s in their structure and distribution rules.

RMD Rules for 457 Plans

457 plans are generally subject to Required Minimum Distributions (RMDs). For most retirement plans, RMDs typically begin at age 73, a change enacted by the SECURE Act. These distributions ensure that deferred income is eventually taxed, rather than remaining sheltered indefinitely.

RMD rules apply to both governmental and non-governmental 457(b) plans once the participant separates from service or retires. RMD amounts are calculated based on the account balance at the end of the previous calendar year and the participant’s life expectancy, using IRS tables. Failure to take the full RMD by the deadline can result in a penalty, which is generally 25% of the amount not distributed.

Governmental 457(b) plans have a notable exception: participants still employed by the sponsoring governmental employer can often delay RMDs past age 73 until retirement. This “still working” exception allows these individuals to continue deferring income and avoid RMDs while actively employed, even if they have reached the RMD age. This provision typically does not apply to non-governmental 457(b) plans, where RMDs generally commence once the participant reaches the required age, regardless of employment status.

For beneficiaries inheriting a 457 plan, the SECURE Act introduced a 10-year rule for most non-spouse beneficiaries. This rule generally requires the entire inherited account balance to be distributed by the end of the tenth calendar year following the account holder’s death. Exceptions to the 10-year rule exist for “eligible designated beneficiaries,” such as surviving spouses, minor children, disabled or chronically ill individuals, and beneficiaries who are not more than 10 years younger than the deceased.

Unique Distribution Aspects of 457 Plans

A key advantage of 457(b) plans, distinguishing them from 401(k)s and 403(b)s, is the absence of the 10% early withdrawal penalty for distributions taken before age 59½. This applies to both governmental and non-governmental 457(b) plans, offering participants flexibility for accessing funds without an additional tax penalty. While income tax is still due on pre-tax withdrawals, the lack of an early withdrawal penalty can be a valuable feature for those who separate from service prior to reaching age 59½.

Some 457 plans permit in-service distributions under specific circumstances, even while employed. These can include provisions for unforeseeable emergencies or specific plan design features allowing for scheduled withdrawals. Taking such distributions can reduce the overall account balance, which subsequently lowers future RMD calculations, as RMDs are based on the prior year’s ending account value.

The “still working” exception for governmental 457(b) plans allows for extended tax deferral. This flexibility enables participants to continue contributing and growing their retirement savings without immediate withdrawal obligations. When distributions do commence, participants typically have options, such as taking a lump sum, periodic payments, or installments, with a lump sum distribution effectively satisfying any RMD obligation for that year by liquidating the account.

Citations:

1. Internal Revenue Service. “Retirement Plans FAQs regarding Required Minimum Distributions.” [https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-required-minimum-distributions](https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-required-minimum-distributions)
2. Investopedia. “457 Plan.” [https://www.investopedia.com/terms/1/457plan.asp](https://www.investopedia.com/terms/1/457plan.asp)