by Ryan Frandsen
on June 1, 2020
Congratulations on completing a successful career with a nonprofit organization! Over the years, you have deferred contributions to your 457 account, which has grown to a nice balance and will now benefit your life going forward.
When it comes to your 457 plan, you have probably been told something like – yeah, your 457 is sort of like a 401(k) plan, but different. Now that you are moving on, you are probably wondering what that “different” part has to do with taking your money out of the plan.
As there are three types of 457 plans, each with very different distribution rules, we will cover each type separately…
457(b) Governmental plan
If you were employed by a government agency, you will fall under these rules. Your options include:
- Rollover – You have the option to “roll” the funds to an IRA, 401(k), 403(b), 401(a) or another 457(b) governmental plan. You will not be able to roll the funds to a SIMPLE IRA (only allowed when your SIMPLE IRA has been open for two years), 457(b) Nongovernmental, 457(f) or 409A plan. Rolling the funds means the money will continue to be in a tax-deferred account and you will not pay income tax on the rollover.
- Take the cash now – If you take the cash now, you will not pay the 10% penalty that you would in other qualified plans, but you will pay taxes on the pre-tax amount you take out. The distribution will be sent directly to you and will be reported on a 1099-MISC form.
- Move the funds later – As with other qualified plans, you have the option to leave the funds in the account or take out part or all the money whenever you like. Ok, this is only true until you reach age 72, which leads us to the next option!
- Required Minimum Distribution – You are required to start taking distributions when you reach age 72. The SECURE Act recently changed the age from 70 ½ to 72. However, in response to COVID-19, the CARES Act states that you do not have to take an RMD in 2020.
457(b) Nongovernmental plan
If you are an executive with a nonprofit entity, your distribution will likely fall into this area. With these plans, you have some unique options that you will not see with any other plan types. The following options are available:
- Rollovers – Rollovers are generally not an option. It is allowed, but only if the funds are rolled to another 457(b) nongovernmental plan, which is rare.
- Take the cash now – You can take the cash now with no 10% penalty, but you will be responsible for the income taxes. The distribution will be sent to your employer, who will pay you the funds through payroll, with the regular W2 taxes applied.
- Move the funds later – With an Irrevocable Election, participants may elect when they would like to receive these funds. Though it is “irrevocable”, there is the option to change the election only one time. You must elect a time frame that you would like to receive the funds (for example – January 2032) or you may elect to receive annual distributions.
- Required Minimum Distribution – You are required to start taking distributions when you reach age 72. The SECURE Act recently changed the age for the initial Required Minimum Distribution from 70 ½ to 72.
Your 457(f) plan is heavily influenced by both 409A and 457 standards. There are no strict rules about distribution timing as with qualified plans, though you must pay taxes in the year there is no longer a substantial risk of forfeiture (the year in which you vest). Your options include:
- Take the cash now – Yes, this is your only option. The distribution will be sent to your employer, who will pay you back through payroll with the regular W2 taxes applied.
- Rollover – Rolling or transferring the funds to a qualified or tax-deferred account is not an option.
- Take it out later – Withdrawing your funds at a later date is not an option.
- Required Minimum Distribution – This action is not applicable.
If your 457(f) plan had not been taxed prior to leaving your company, it will be now. Being fortunate enough to have a 457(f) plan, you will also be in the top tax bracket. You likely do not want your full balance taxed in the year that you just received a complete year of pay, but you do not have the option to delay the reception of your funds. As taxes are applied in the year of your termination date (not when the check is sent), timing your retiring at the beginning of January may save you immensely in taxes when compared to retirement in December at the end of a full year of service.
If you have any further questions or would like to discuss these options in more detail, please contact National Benefit Services at 800-274-0503.