Current Pension Topics
Restriction on 457 Withdrawals

By JOEL L. FRANK

Q.: I just got off the phone with the Deferred Comp office. I am past 59-1/2 and want to withdraw $25,000 from my 457(b) account. I was told that retirement/severance of employment is required in order to make withdrawals. Is this right? I always thought that upon reaching age 59-1/2, I could make withdrawals from my 457(b) account.

P.S.

A.: The devil is in the details. While in-service withdrawals, for any reason, from 401(k) and 403(b) plans are permitted upon attaining age 59-1/2, a 457(b) plan participant must retire/sever employment in order to make normal withdrawals. 457(b) withdrawals, however, on account of financial hardship are permitted with appropriate documentation. Additionally, small account balances may be distributed provided all of the following conditions are met.

1. The total account balance does not exceed $5,000;

2. No amount has been deferred (contributed) by the participant during the two year period ending on the date of distribution; and

3. There has been no prior distribution to such participant under this provision.

Every January, the 457(b) Plan identifies those participants who meet the criteria for a 457(b) Plan small account withdrawal. A letter is automatically sent to these participants notifying them that, if they so request, their account balance will be distributed to them in a lump sum. After obtaining a small account withdrawal, the participant is no longer a member of the 457(b) Plan. However, the employee may rejoin the plan at any time.

P.S.: I realize this information is of no benefit to you but I thought your question would be a good time to review the circumstances under which 457(b) plan withdrawals are allowed while employed by the city. For those of you who plan on working past age 59-1/2, you may want to consider joining the city's 401(k) plan and/or the city's IRA plan, where withdrawals, for any reason, are permitted after reaching age 59-1/2.

Notwithstanding the fact that you may meet the requirements for making withdrawals from pre-tax accounts for any reason (working or retired), such accounts were established by Congress to be tapped for retirement income purposes and not for the purchase of a car, down payment for a house or the wedding of a child, etc. The planning for such expenditures should be made with after-tax savings.

Q.: Here is our situation: I have a $21,000 balance in a 403(b) plan that I can no longer contribute to because I was laid off by my employer and am now a stay-at-home mom. My family is now in a position where the money would be a lifesaver. We haven't made up our minds, but we are wondering about taxes and penalties if we were to withdraw this money. I am only 30, so I know there will be a 10-percent early distribution penalty. What are the other taxes and fees?

D.P.

A.: I would like to tell you about the Rule of 72, where 72 is the numerator and the assumed investment return is the denominator. The numerator is fixed, while the denominator is an educated guess. Let's assume a denominator or investment return of 8 percent. 72/8 = 9. This means if you assume an investment return of 8 percent per year, your investment will double in value in nine years. This means your $21,000 will become $42,000 in nine years and become $84,000 in 18 years and become $168,000 in 27 years and become $336,000 in 36 years when you celebrate your 66th birthday and ready to retire from gainful employment. Please recognize the future value of this $21,000. I would not touch it!

Having said that, please be aware that in addition to the 10-percent penalty tax, the $21,000 is taxable at ordinary rates. I assume a tax bracket of 20 percent. So you are looking at about 30 percent on the Federal level. At this point you wind up with about $14,700. To this you must deduct any income tax due on the state level as well as any exit fees the investment provider is due.

Mr. Frank is a fee-only Retirement Financial Planner. He can be reached by telephone at (732) 536-9472, or via e-mail at rollover@optonline.net.