457(b) Question

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tophdna
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Joined: Sun Apr 12, 2015 11:44 am
Location: USA

457(b) Question

Post by tophdna »

I currently have investments in my jobs 457(b) deferred comp plan. This includes monies that came from a prior employer’s 457(b) plan and a 401(k). I was under the impression that I had access to the money (albeit following rules/laws set by the IRS). I understand taking early withdrawals will result in a taxable event and a penalty for any of the monies that came from the 401(k). But my employer’s third party manager of the deferred compensation plan informed me that only hardship reasons will allow a withdrawal and these are rules from the IRS.

My question today is I was under the impression that IRS doesn’t care either way as long as you pay taxes on the withdrawal and any penalties owed if you are under 59 1/2 years old (without any hardship reasons). My deferred comp plan informed me that I have no access to the money (my reasoning did not fall under the IRS rules).

I believe what is going on here are rules/policies set forth by my employer and the third party Deferred comp manager. I do not think the IRS cares either way as long as I pay the taxes owed and a penalty since I’m under 59 1/2.

Also they will not allow me to withdrawal from the 457(b) monies only (which would avoid the penalty). They informed me that they do not identify which funds they are pulling from but just the entire pool so it would definitely cause the penalty regardless. But I should take a loan out on it instead. I believe they do this to push you to use their loan option so they can make money off it and also to ultimately keep your funds within their management.

Can anyone offer any clarification on this? Even if I cannot take funds out (I do realize this is not a good option, it was under specific family emergency), I would rather the funds be under my control. I keep Roth IRA’s with vanguard and would possibly be interested in moving these funds to a 401(k) over there but I do not believe they are going to let me transfer any of it (rolling it over), unless I separate employment which I do not plan to do.

Any insight would be greatly appreciated. Thanks!
fabdog
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Location: Williamsburg VA

Re: 457(b) Question

Post by fabdog »

The issue is that the rules to be a tax deferred plan cover the conditions. Most plans for this reason do not allow in service withdrawals except those that meet the specific hardship definitions.

So not an IRS rule for you on your taxes, but on how plans are structured and run

Perhaps this will help

https://www.irs.gov/retirement-plans/ha ... -and-loans

Mike
Topic Author
tophdna
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Joined: Sun Apr 12, 2015 11:44 am
Location: USA

Re: 457(b) Question

Post by tophdna »

Thank you Mike for answering with such a clear response. Exactly what I was looking for.
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LadyGeek
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Re: 457(b) Question

Post by LadyGeek »

This thread is now in the Personal Finance (Not Investing) forum (retirement plan).
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rkhusky
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Joined: Thu Aug 18, 2011 8:09 pm

Re: 457(b) Question

Post by rkhusky »

My sister was told that she couldn't roll her state plan over to an IRA until she is 62, even though she isn't working there any more. It's a small amount, so she isn't worrying about it.
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retiredjg
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Re: 457(b) Question

Post by retiredjg »

tophdna wrote: Tue May 17, 2022 8:09 am I currently have investments in my jobs 457(b) deferred comp plan. This includes monies that came from a prior employer’s 457(b) plan and a 401(k). I was under the impression that I had access to the money (albeit following rules/laws set by the IRS). I understand taking early withdrawals will result in a taxable event and a penalty for any of the monies that came from the 401(k). But my employer’s third party manager of the deferred compensation plan informed me that only hardship reasons will allow a withdrawal and these are rules from the IRS.

My question today is I was under the impression that IRS doesn’t care either way as long as you pay taxes on the withdrawal and any penalties owed if you are under 59 1/2 years old (without any hardship reasons). My deferred comp plan informed me that I have no access to the money (my reasoning did not fall under the IRS rules).

I believe what is going on here are rules/policies set forth by my employer and the third party Deferred comp manager. I do not think the IRS cares either way as long as I pay the taxes owed and a penalty since I’m under 59 1/2.

Also they will not allow me to withdrawal from the 457(b) monies only (which would avoid the penalty). They informed me that they do not identify which funds they are pulling from but just the entire pool so it would definitely cause the penalty regardless. But I should take a loan out on it instead. I believe they do this to push you to use their loan option so they can make money off it and also to ultimately keep your funds within their management.

Can anyone offer any clarification on this? Even if I cannot take funds out (I do realize this is not a good option, it was under specific family emergency), I would rather the funds be under my control. I keep Roth IRA’s with vanguard and would possibly be interested in moving these funds to a 401(k) over there but I do not believe they are going to let me transfer any of it (rolling it over), unless I separate employment which I do not plan to do.

Any insight would be greatly appreciated. Thanks!
Lots of different things going on here. Here is how I understand it.

1. The contributions you are making to your current 457 are not available for withdrawal while you work there unless the plan allows hardship withdrawals. Not all do. This is law or IRS rule.

2. Whatever you rolled into the 457 (old 457 and old 401k) is allowed by the IRS to be rolled out, but the plan itself does not have to allow this. It sounds like maybe your plan does not.

3. Your plan must keep the accounting for the 401k money and the 457 separate because the 401k money is not available for early withdrawal without penalty after you leave that employer. So maybe you can roll the 401k out to IRA but not the old 457. That may not be helpful since you would have to pay a penalty to take it out of IRA.

4. If you had left the old 457 where it was, you could have taken the money out of that one and paid tax but no penalty. IRS rule/law.
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