“I work with a public higher education institution that sponsors both a 403(b) and a 457(b) plan. A retiring employee, who is a participant in both plans, wants to take systematic withdrawals (monthly payments) from both. I didn’t think she can do so for a 457(b) plan, since it is a plan of deferred compensation. However, the plan’s recordkeeper is saying that systematic withdrawals are permitted from under both plans. Is the recordkeeper correct?”
Charles Filips, Kimberly Boberg, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, senior financial adviser at CAPTRUST, answer:
The Experts can certainly understand your hesitancy, since the general concept of deferred compensation is that it is taxable when such compensation is no longer deferred. However, a governmental 457(b) plan is a special type of deferred compensation plan, where the distribution rules are much more akin to a 403(b) plan than to, say, a traditional deferred compensation plan. In fact, a governmental 457(b) plan may elect to permit systematic withdrawals and rollovers out of the plan. Now, if this were a 457(b) plan of a PRIVATE tax-exempt (such as a private university), the distribution rules would be much more restrictive, and systematic withdrawals (or any other non-lump-sum distribution option) for those plans would need to be carefully structured to maintain the unfunded status of such deferred compensation plan and avoid immediate taxation under constructive receipt rules. Of course, in both cases it is important to look at the plan document—what may be permissible could be more narrowly proscribed in the actual plan terms.
One word of caution, though; early retirees (those retiring prior to age 55) often use the systematic withdrawal option to avoid the 10% premature distribution penalty that might normally apply to distributions taken following a pre-55 retirement. However, there is no 10% premature distribution penalty applicable to 457(b) plans (governmental or private nonprofit), so it is not necessary to take a systematic withdrawal in order to avoid such a penalty.
NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.
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