How to Cash Out a 457b Plan

A 457(b) plan is a tax-advantaged retirement plan restricted to state and local public governments and qualifying tax-exempt institutions. As with a 401(k) plan, you can get a tax deduction on money you contribute to a 457(b) plan, and your earnings grow on a tax-deferred basis. Withdrawals from a 457(b) plan are highly regulated, so you may not be able to access the money whenever you'd like. You may also face taxes on your distributions.

Advertisement

How to Cash Out a 457b Plan
Image Credit: SARINYAPINNGAM/iStock/GettyImages

Video of the Day

Eligible Withdrawals

Unlike other types of retirement plans, such as IRAs, you can't take a distribution from a 457(b) plan whenever you would like, even if you're willing to pay a penalty. The IRS limits 457(b) distributions to the following triggering events: separation of service from employer; disability; death; financial hardship; reaching age 59 1/2; plan termination; or a qualified domestic relations order, which is a <ahref="https: www.law.cornell.edu="" wex="" qualified_domestic_relations_order_qdro"=""> </ahref="https:>judgment or court order regarding the distribution of retirement plan benefits to another person, such as in the event of divorce.

Advertisement

Video of the Day

For most participants, these restrictions mean that you must retire or reach age 59 1/2 before you can take money out of your 457(b) plan.

Distribution Process

If you qualify for a 457(b) distribution, you'll have to contact your plan administrator and complete the appropriate paperwork to cash out your plan. After providing personal information such as your Social Security number, name and address, you'll have to indicate why you are qualified to take a distribution. Next, you'll choose how you want your money, such as via check or bank transfer. If you want taxes withheld from your distribution, you'll have to indicate that on your withdrawal form.

Advertisement

Taxes and Penalties

All of your contributions and earnings in a 457(b) plan are tax-deferred. When you cash in your 457(b), you must pay ordinary income tax on anything you withdraw. If you have a large 457(b) balance, taking out all your money at once might kick you up into a higher tax bracket, so consider taking your withdrawals on an installment basis to lower your tax burden.

Advertisement

Advertisement

With some retirement plans, you may owe a 10 percent penalty if you take money out before you turn 59 1/2. However, if you qualify for a 457(b) distribution before you reach age 59 1/2, that penalty won't apply. You'll still owe income taxes on your withdrawal unless you roll over your distribution into another plan, such as an IRA or a new employer's 457.

Advertisement

Advantages & Disadvantages

The main advantage of cashing out your 457(b) is that you get to spend your money. If you're retired, you can begin to enjoy the fruits of your labor after years of saving and enjoying the benefits of tax deferral. If you withdraw the money for an emergency, you can fund your immediate needs instead of drawing on credit cards or other high-interest sources.

Advertisement

The downside of cashing out your 457(b) is that you no longer get to enjoy tax-deferred growth. If you raid your account before you retire, you'll be depleting your retirement nest egg and may not have enough when you need it after you stop working. As a result, you might have to save more or work longer to meet your retirement goals.

Advertisement

Erik Carter at Forbes.com notes that the opportunity cost of withdrawing money from a retirement account is a major negative that usually outweighs any benefit. If you're facing a major hardship, Carter states that a loan from your retirement plan may be a better option, since you pay interest back to yourself.

Advertisement

Advertisement

Report an Issue

screenshot of the current page

Screenshot loading...