457 Plan Distributions

Submitted by Todd Martin on Wed, 2017-02-08 18:00

Have a client who is 45 and recently retired from the fire department in September 2016 with a pension. He has about $200,000 in his previous employer’s 457 plan. Here are my questions:

1. I know he can withdrawal his account balance, subject to the provisions of the plan, without having to pay the 10% tax penalty because he is under 59 1/2. However, the entire distribution would be taxable to him. Are there any know restrictions other than these?

2. Are there any 60 day rollover rules that apply to 457 plans? If he takes the distribution and then puts the money back into either his 457 plan, which they probably will not allow since he is no longer employed, or an IRA and assuming he has not done an indirect rollover in the last 12 months, will he be able to do this? I also know that if he rolls it over to an IRA, he would now be subject to the 59 1/2 rule and 10% tax penalties.

Please let me know if there is anything else that needs to be considered. Thank you as always for you help and expertise.

T. C. Martin



Submitted by Alan - IRA critic on Wed, 2017-02-08 20:37

  • He should check with the plan administrator to see what partial distributions are allowed. Even if he can only request one per year he could probably manage around that. The penalty would be avoided. If the plan does not allow partial distributions, he would probably have to roll the plan to an IRA and start a 72t SEPP plan, although such a plan would have to run 14 years so this is not particularly desirable. It would also generate less than 9,000 per year in distributions, so there is a major risk of having to bust the plan along the line.
  • No other restrictions. The key is what partial distribution options the plan allows. Could be none.
  • A 60 day rollover could be done and it does not count toward the one rollover limitation per 12 month period. However, he probably could not hold out more than a couple years for expenses without increasing his marginal rate. The rest could be rolled to an IRA, and would allow him to start any SEPP plan a couple years later. Better 12 years than 14, but that is still a long term plan that could eventually be busted.
  • Perhaps he should consider continuing to work for awhile. 45 is pretty young to retire without being disabled.

Submitted by Todd Martin on Wed, 2017-02-08 21:04

Thank you Alan.  Have a few follow up questions & comments:

  • I understand about checking with the plan administrator on what conditions qualify as a distribution or even if they are allowed.  Let’s say that none exist.  Since this is a 457 plan, can he withdraw the entire amount, avoid the 10% tax penalty, and as long as he puts the money put into an IRA within 60 days and have the entire amount continue to growth tax deferred and not a taxable event?
  • Per your comments, if we rollover the 457 plan to an IRA, take out the money for his use and he puts it back into the IRA within the 60 days, why would that NOT count as the one rollover limit per 12 months?

Thank you again for yoru expertise and assistance.

Submitted by Alan - IRA critic on Wed, 2017-02-08 23:46

  • Yes, but he should do a direct rollover to avoid 20% withholding. If he wants to keep some of the distribution, he should determine if the amount he wants to be taxed can be distributed to him, and the rest be rolled to an IRA as a direct rollover. Taxes will only be withheld on the portion is does not intend to roll over.
  • DIstribution from an IRA to be rolled back to an IRA does count toward the one rollover limit. But the rollover from the 457 to the IRA does not, whether done by direct rollover or by indirect rollover.

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