Roth 457b
Since 457b’s do not have early withdrawal pentalties has anyone seen any source that discusses how the new roth 457b will be treated if taken out before 59.5?
does one have to hold for 5 yrs AND be 59.5(like 401k and 403bs) or would the $ be tax free regardless of age?
Any information along with your source would be greatly appreciated.
Thanks in advance,
Nick
Permalink Submitted by Alan Spross on Thu, 2011-03-31 18:58
Nick,
The text of the 2010 Jobs Act just adds 457b accounts as eligible to accept designated Roth contributions. There are no special provisions and therefore Sec 72 still applies with respect to early withdrawal penalties. Sec 72 still has no provisions for such a penalty on non qualified plan distributions, therefore the Roth 457b funds would not have a penalty in the same manner as pre tax 457b account would not have a penalty.
But this is different from the qualification rules, which just happen to also use age 59.5 as a requirement along with the 5 year holding period. The result is that no ROth 457 could be qualified prior to 2016 since the 5 year period starts in 2011 at the earliest.
A non qualified distribution would be treated just like a Roth 401k distribution EXCEPT that the early withdrawal penalty does not apply. Earnings would be pro rated with contributions (as opposed to the Roth IRA ordering rules).
Example: Distribution from Roth 457b started in 2011 with distribution prior to 2016. Account holds 40,000 of Roth deferrals and is worth 50,000 due to earnings.
a) Distribute 10,000 from plan in 2014: 20% of distribution is earnings, ie 2,000. The 2,000 would be subject to income tax but no penalty because the funds are still coming from a NQ 457b plan.
b) Distribute 10,000 in 2016 at age 58: Roth 457b still not qualified even though 5 years has been met. Tax same as above. Rollover to Roth IRA considered to be 8,000 of regular contributions to the Roth IRA and 2,000 of earnings.
c) Distribute 10,000 in 2016 or later at age 60: Account is fully qualified and tax free. Any rollover to a Roth IRA is considered as Roth IRA regular contribution for Roth IRA ordering rules.
Summary: The only difference between a Roth 457b and a Roth 401k is that the early withdrawal penalty does not apply to the 457b when it would have to the Roth 401k. The aging requirement at 59.5 is still in place but only affects whether earnings are taxable, not the early withdrawal penalty.
If I can locate another source with this conclusion, will post a link to it later. I have not seen a comprehensive summary yet.
Edited post:
I located this link, note that the final paragraph agrees with my conclusion, ie no early withdrawal penalty. The IRS has not yet released detailed Notices covering Roth 457b distributions:
http://www.legendgroup.com/Retirement-Accounts/457b-Governmental/Distrib…