2025 Guide: Are 457 Plan Withdrawals Taxable and What Are the Costs?

Withdrawals from 457 plans are taxable but uniquely avoid early withdrawal penalties.

Contributions to 457 plans grow tax-deferred until retirement, after which funds can be withdrawn or rolled over. Unlike 401(k) and 403(b) plans, 457 withdrawals are taxable regardless of age, but they do not incur the typical early withdrawal penalties, offering greater flexibility.

Key Insights

• The 457 plan is a less common, more intricate retirement option primarily for government and nonprofit employees.
• Private sector workers generally use 401(k)s, while public school and nonprofit employees often have 403(b) plans.
• Withdrawals are permitted upon retirement, employment termination, or qualifying hardships.
• 457(b) plans mainly serve state and local government workers; 457(f) plans cater to highly compensated or non-government employees.
• Funds in 457(b) plans can be rolled over into traditional IRAs and other qualified accounts.

Understanding 457 Plans

Unlike qualified plans, 457 plans have distinct rollover and distribution rules. Initially exclusive to government and 501(c)(3) organizations, they are now available more broadly, allowing participants to also fund Roth IRAs and potentially maximize retirement savings.

Before retirement or separation, withdrawals are allowed for specific financial hardships such as medical emergencies, natural disasters, or eviction, qualifying as distributable events under IRS rules.

Important Update

Participants must begin required minimum distributions at age 73 if born between 1951 and 1959, or at age 75 if born in 1960 or later—updated from the previous threshold of 72.

How 457 Plans Differ from 401(k) and 403(b)

457 plans allow penalty-free withdrawals immediately upon retirement, regardless of age, with distributions taxed as ordinary income. Governmental 457(b) plans also allow rollovers into IRAs or other qualified plans.

Additionally, Roth 457 options exist for government employees, enabling after-tax contributions and tax-free qualified withdrawals.

Contribution Limits for 2024

Employees can contribute up to $23,000 annually to a 457(b) plan. Those aged 50 and above may add a catch-up contribution of $7,500, enhancing their retirement savings potential.

Special Features and Considerations

As unique non-qualified deferred compensation plans, 457 plans offer advantages over typical retirement accounts, but come in various types: governmental 457(b) (eligible plans) and non-governmental 457(f) (ineligible plans) with differing benefits and restrictions.

Governmental 457(b) plans have contribution limits and tax deferral until distribution. Non-governmental 457(f) plans mostly allow employer contributions, do not permit catch-up contributions, and cannot be rolled over into IRAs or other qualified plans.

Tax Treatment of 457 Withdrawals

Withdrawals are treated as ordinary income and exempt from early withdrawal penalties, making 457 plans flexible for retirees.

Impact on Social Security

Distributions from 457 plans are not considered earned income and do not reduce Social Security benefits.

Penalty-Free Withdrawals

457 plan holders can access funds at any time without facing IRS early withdrawal penalties, unlike other retirement accounts.

Minimizing Taxes on Withdrawals

While most 457 withdrawals are taxable, Roth 457 distributions are tax-free if qualified. Governmental 457(b) plan participants can also roll over funds tax-free into other qualified accounts, excluding Roth IRAs. Non-governmental plan holders lack rollover options.

Final Thoughts

457 plans provide a flexible, tax-deferred retirement savings vehicle, especially attractive due to the absence of early withdrawal penalties. With evolving regulations and contribution limits for 2024, understanding the nuances of 457 plans is essential for maximizing retirement readiness.

Note: Updated July 17, 2024, to clarify rollover eligibility rules.

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