Rules That Apply to Deferred Compensation Withdrawals

Rules for deferred compensation can vary between states.
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Deferred compensation plans, such as 457 and 409A plans, are established through the Internal Revenue Service as public retirement savings accounts that mirror many benefits of 401-K options. Money is siphoned off from a paycheck and put into the plan for withdrawal at a later time. But rules can be complicated for deferred compensation withdrawals. Tax implications, penalties and preventative measures make the removal of funds quite hard.

Federal Tax Implications

Accruing savings in a deferred compensation account can prepare you for retirement, but drawing on these funds--even if you are retired--means you must continue to pay federal income taxes. Funds in state employee-deferred compensation plans are provided through payroll earnings and deemed supplemental wages, withdrawing against the account may require you to complete a W-2 tax form. To avoid this, some states may allow you to pay income taxes on deferred compensation when funds are initially earned.

Emergency Withdrawals

It may not be possible to withdraw from a deferred compensation account unless you have a dire emergency or until you reach a certain age. In the event of a catastrophic emergency, such as unforeseeable medical bills not covered by insurance, all states provide you to the opportunity to withdraw against deferred funds. To do so, an application must be completed and supplemental documentation may be required. Once the request is completed, contributors may have wait a set number of days for the request to process.

Preventative Measures

A number of preventative measures make it difficult to withdraw deferred compensation. For example, New York State allows you to make a withdrawal if the account total is less than $5,000, no contributions have been made for 24 months and there occurred no previous withdrawals. Participants who do not meet city service requirements in the state of New York may only be able to withdraw once the contributor reaches 70 years of age.

In New York, once proper severance from city service employment has been attained, contributors can withdraw from deferred compensation accounts without penalty, regardless of age.

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