457 withdrawal getting early withdrawal penalty (DROP MONEY)
457 withdrawal getting early withdrawal penalty (DROP MONEY)
This year I made a withdrawal from my Gov 457 plan. I am retired public safety employee. My 457 was funded from a regular deferred comp contributions and at the end of my career I did a D.R.O.P. program where the let me retire, hired me back for the same pay and the pension I made went into an account and was released to my 457 plan at the end of the drop. When I received my 1099-R I received 2, one for each of the buckets of money (drop and regular deferred comp). The drop money bucket marked distribution code 1 for bock 7 Early distribution, "no known exception".
When I withdrew the money, I did not have the option of where to withdrawal the money from, they took it equally from both buckets, I had a conversation with the employee that helped me set up the withdrawal and he said he thought I fell under the exception but I should check with my tax guy (I didn't).
My empower account has the 2 buckets of money labeled employee before tax and employee roll over before tax.
The exception is listed below. It seems I do qualify for the exception. I was 54 when I retired after 30 years of service. The definition of government plan seems pretty wide opened also. Do I argue this point with Empower (my 457 company) and try to get them to reissue the 1099-R or do I argue it with the IRS?
Exceptions to the 10% additional tax
Distributions made to a qualified public safety employee from a governmental plan (within in the meaning of section 414(d)) provided that the qualified public safety employee has separated from service during or after the year in which they attained age 50 or 25 years of service under the plan, whichever is earlier.
§414. Definitions and special rules
(d) Governmental plan
For purposes of this part, the term "governmental plan" means a plan established and maintained for its employees by the Government of the United States, by the government of any State or political subdivision thereof, or by any agency or instrumentality of any of the foregoing. The term "governmental plan" also includes any plan to which the Railroad Retirement Act of 1935 or 1937 applies and which is financed by contributions required under that Act and any plan of an international organization which is exempt from taxation by reason of the International Organizations Immunities Act (59 Stat. 669). The term "governmental plan" includes a plan which is established and maintained by an Indian tribal government (as defined in section 7701(a)(40)), a subdivision of an Indian tribal government (determined in accordance with section 7871(d)), or an agency or instrumentality of either, and all of the participants of which are employees of such entity substantially all of whose services as such an employee are in the performance of essential governmental functions but not in the performance of commercial activities (whether or not an essential government function).
When I withdrew the money, I did not have the option of where to withdrawal the money from, they took it equally from both buckets, I had a conversation with the employee that helped me set up the withdrawal and he said he thought I fell under the exception but I should check with my tax guy (I didn't).
My empower account has the 2 buckets of money labeled employee before tax and employee roll over before tax.
The exception is listed below. It seems I do qualify for the exception. I was 54 when I retired after 30 years of service. The definition of government plan seems pretty wide opened also. Do I argue this point with Empower (my 457 company) and try to get them to reissue the 1099-R or do I argue it with the IRS?
Exceptions to the 10% additional tax
Distributions made to a qualified public safety employee from a governmental plan (within in the meaning of section 414(d)) provided that the qualified public safety employee has separated from service during or after the year in which they attained age 50 or 25 years of service under the plan, whichever is earlier.
§414. Definitions and special rules
(d) Governmental plan
For purposes of this part, the term "governmental plan" means a plan established and maintained for its employees by the Government of the United States, by the government of any State or political subdivision thereof, or by any agency or instrumentality of any of the foregoing. The term "governmental plan" also includes any plan to which the Railroad Retirement Act of 1935 or 1937 applies and which is financed by contributions required under that Act and any plan of an international organization which is exempt from taxation by reason of the International Organizations Immunities Act (59 Stat. 669). The term "governmental plan" includes a plan which is established and maintained by an Indian tribal government (as defined in section 7701(a)(40)), a subdivision of an Indian tribal government (determined in accordance with section 7871(d)), or an agency or instrumentality of either, and all of the participants of which are employees of such entity substantially all of whose services as such an employee are in the performance of essential governmental functions but not in the performance of commercial activities (whether or not an essential government function).
Last edited by 2ball on Wed Jan 29, 2025 10:22 am, edited 1 time in total.
K.I.S.S.- Keep It Stupid Simple
Re: 457 withdrawal getting early withdrawal penalty
now I am getting confused. tax act has the below as what code 1 means and they make it sound like code 2 is for regular pension payments.
Qualified retirement plan distributions (doesn’t apply to IRAs) you receive after separation from service when the separation from service occurs in or after the year you reach age 55 (age 50 for qualified public safety employees). For distributions to qualified public safety employees on or after December 30, 2022, include distributions to employees with 25 years of service with the plan, distributions to firefighters covered by private sector retirement plans, and distributions to those employees who provide services as a corrections officer or as a forensic security employee, providing for the care, custody, and control of forensic patients, who meet the age requirement above.
Qualified retirement plan distributions (doesn’t apply to IRAs) you receive after separation from service when the separation from service occurs in or after the year you reach age 55 (age 50 for qualified public safety employees). For distributions to qualified public safety employees on or after December 30, 2022, include distributions to employees with 25 years of service with the plan, distributions to firefighters covered by private sector retirement plans, and distributions to those employees who provide services as a corrections officer or as a forensic security employee, providing for the care, custody, and control of forensic patients, who meet the age requirement above.
K.I.S.S.- Keep It Stupid Simple
Re: 457 withdrawal getting early withdrawal penalty
Form 5329 is what you're looking for, but I don't think it's going to help you. You might be on the hook for the 10% penalty for the portion of the withdrawal that came from the rollover sub-account... (a 457b is a "nonqualified plan", so Exception 1 that you quoted does not apply and Exception 13 specifically states "distributions from 457b which aren’t from a
rollover from a qualified retirement plan").
https://www.irs.gov/forms-pubs/about-form-5329

ETA: It's possible that your 457b rules may require withdrawals to be distributed pro-rata between the regular account and the rollover account, so you may not be able to avoid withdrawing money from the rollover sub-account in the 457b (you can find your plan rules in the plan's SPD). If you can't choose which sub-account to pull the money from in the 457b, then the best remedy would likely be to rollover the "rollover sub account" to an IRA and not use that for withdrawals until age 59.5, only withdraw from the 457b for the next few years.
Retired Firefighter | 65% Equities/35% TSP G Fund
Re: 457 withdrawal getting early withdrawal penalty
delete posted by mistake
Last edited by 2ball on Wed Jan 29, 2025 10:09 am, edited 1 time in total.
K.I.S.S.- Keep It Stupid Simple
Re: 457 withdrawal getting early withdrawal penalty
Man this is throwing me.
I am confused why 457 plans are even mentioned, there is no penalty for withdrawal from a 457 if you are retired.
The drop money is in my 457 account that has the same funds available that were available to me when I was working. I guess my argument is, that its not an early distribution, its in a 457 account and I am retired. and if its not in my 457 what is it in and is that a qualified plan that is subject to the public safety exception?
I'm guessing that there is no way to undo the withdrawal and put the money back?
I found a coworker that said he took money drop out and did not get the early withdrawal penalty. He has a different deferred comp vender though. The rules are the rules though right? either we both should be able to do it of neither of us should be able to do it? Someone does his taxes, so he is not sure if he filed a Form 5329 or his 1099R had box 7 with a 2 in it.
I am confused why 457 plans are even mentioned, there is no penalty for withdrawal from a 457 if you are retired.
The drop money is in my 457 account that has the same funds available that were available to me when I was working. I guess my argument is, that its not an early distribution, its in a 457 account and I am retired. and if its not in my 457 what is it in and is that a qualified plan that is subject to the public safety exception?
I'm guessing that there is no way to undo the withdrawal and put the money back?
I found a coworker that said he took money drop out and did not get the early withdrawal penalty. He has a different deferred comp vender though. The rules are the rules though right? either we both should be able to do it of neither of us should be able to do it? Someone does his taxes, so he is not sure if he filed a Form 5329 or his 1099R had box 7 with a 2 in it.
K.I.S.S.- Keep It Stupid Simple
Re: 457 withdrawal getting early withdrawal penalty
You do not owe the penalty and the 1099R Box 7 should have listed Code 2. In the following link to the 1099R Inst, go to p 16 exception code 2, 5th bullet point:2ball wrote: Wed Jan 29, 2025 10:08 am Man this is throwing me.
I am confused why 457 plans are even mentioned, there is no penalty for withdrawal from a 457 if you are retired.
The drop money is in my 457 account that has the same funds available that were available to me when I was working. I guess my argument is, that its not an early distribution, its in a 457 account and I am retired. and if its not in my 457 what is it in and is that a qualified plan that is subject to the public safety exception?
I'm guessing that there is no way to undo the withdrawal and put the money back?
I found a coworker that said he took money drop out and did not get the early withdrawal penalty. He has a different deferred comp vender though. The rules are the rules though right? either we both should be able to do it of neither of us should be able to do it? Someone does his taxes, so he is not sure if he filed a Form 5329 or his 1099R had box 7 with a 2 in it.
https://www.irs.gov/pub/irs-pdf/i1099r.pdf
Problem is, the IRS has failed to provide a Form 5329 penalty exception code for this specific 1099R coding error.
Plan A: Provide this documentation to the plan and request revision of the 1099R to Code 2. That would eliminate possible IRS questioning if you had to use Plan B.
Plan B: If Plan A is rejected by the plan, suggest you file the 5329 using Exception Code 01, which is the most similar to this distribution and references PSOs. The distributing plan is a govt. plan and technically not a qualified plan, but for purposes of the penalty rollover amounts are treated as qualified plan funds. If the IRS questions this after you file, you will have to explain why you used exception code 01. And the reason is because the IRS has not provided a specific exception code for this type of coding error.
Final note: Sec 72(t)(9) states that a distribution from a govt plan from rolled over funds is treated as a distribution from a qualified plan, and code 2 would be correct if the distribution had been made from a qualified plan. A PSO should not just fall through the cracks, and the 457b should have considered your PSO exception.
Good luck.
Re: 457 withdrawal getting early withdrawal penalty
great info, thank youAlan S. wrote: Wed Jan 29, 2025 11:48 amYou do not owe the penalty and the 1099R Box 7 should have listed Code 2. In the following link to the 1099R Inst, go to p 16 exception code 2, 5th bullet point:2ball wrote: Wed Jan 29, 2025 10:08 am Man this is throwing me.
I am confused why 457 plans are even mentioned, there is no penalty for withdrawal from a 457 if you are retired.
The drop money is in my 457 account that has the same funds available that were available to me when I was working. I guess my argument is, that its not an early distribution, its in a 457 account and I am retired. and if its not in my 457 what is it in and is that a qualified plan that is subject to the public safety exception?
I'm guessing that there is no way to undo the withdrawal and put the money back?
I found a coworker that said he took money drop out and did not get the early withdrawal penalty. He has a different deferred comp vender though. The rules are the rules though right? either we both should be able to do it of neither of us should be able to do it? Someone does his taxes, so he is not sure if he filed a Form 5329 or his 1099R had box 7 with a 2 in it.
https://www.irs.gov/pub/irs-pdf/i1099r.pdf
Problem is, the IRS has failed to provide a Form 5329 penalty exception code for this specific 1099R coding error.
Plan A: Provide this documentation to the plan and request revision of the 1099R to Code 2. That would eliminate possible IRS questioning if you had to use Plan B.
Plan B: If Plan A is rejected by the plan, suggest you file the 5329 using Exception Code 01, which is the most similar to this distribution and references PSOs. The distributing plan is a govt. plan and technically not a qualified plan, but for purposes of the penalty rollover amounts are treated as qualified plan funds. If the IRS questions this after you file, you will have to explain why you used exception code 01. And the reason is because the IRS has not provided a specific exception code for this type of coding error.
Final note: Sec 72(t)(9) states that a distribution from a govt plan from rolled over funds is treated as a distribution from a qualified plan, and code 2 would be correct if the distribution had been made from a qualified plan. A PSO should not just fall through the cracks, and the 457b should have considered your PSO exception.
Good luck.
I am still reading and understanding so I can put up my side with confidence.
If plan A does not work and I move to plan B, it will probably be a year or so later when the IRS questions me?
K.I.S.S.- Keep It Stupid Simple
Re: 457 withdrawal getting early withdrawal penalty
please delete I goofed up quoting and couldn't fix it.
Last edited by 2ball on Mon Feb 03, 2025 1:31 pm, edited 1 time in total.
K.I.S.S.- Keep It Stupid Simple
Re: 457 withdrawal getting early withdrawal penalty
so Empower claims they have no ability to change the distribution code. That does not sound correct to me and the person at empower didn't seem to know what they were talking about. I will call back and make sure I get the same answer from someone else.Alan S. wrote: Wed Jan 29, 2025 11:48 amYou do not owe the penalty and the 1099R Box 7 should have listed Code 2. In the following link to the 1099R Inst, go to p 16 exception code 2, 5th bullet point:2ball wrote: Wed Jan 29, 2025 10:08 am Man this is throwing me.
I am confused why 457 plans are even mentioned, there is no penalty for withdrawal from a 457 if you are retired.
The drop money is in my 457 account that has the same funds available that were available to me when I was working. I guess my argument is, that its not an early distribution, its in a 457 account and I am retired. and if its not in my 457 what is it in and is that a qualified plan that is subject to the public safety exception?
I'm guessing that there is no way to undo the withdrawal and put the money back?
I found a coworker that said he took money drop out and did not get the early withdrawal penalty. He has a different deferred comp vender though. The rules are the rules though right? either we both should be able to do it of neither of us should be able to do it? Someone does his taxes, so he is not sure if he filed a Form 5329 or his 1099R had box 7 with a 2 in it.
https://www.irs.gov/pub/irs-pdf/i1099r.pdf
Problem is, the IRS has failed to provide a Form 5329 penalty exception code for this specific 1099R coding error.
Plan A: Provide this documentation to the plan and request revision of the 1099R to Code 2. That would eliminate possible IRS questioning if you had to use Plan B.
Plan B: If Plan A is rejected by the plan, suggest you file the 5329 using Exception Code 01, which is the most similar to this distribution and references PSOs. The distributing plan is a govt. plan and technically not a qualified plan, but for purposes of the penalty rollover amounts are treated as qualified plan funds. If the IRS questions this after you file, you will have to explain why you used exception code 01. And the reason is because the IRS has not provided a specific exception code for this type of coding error.
Final note: Sec 72(t)(9) states that a distribution from a govt plan from rolled over funds is treated as a distribution from a qualified plan, and code 2 would be correct if the distribution had been made from a qualified plan. A PSO should not just fall through the cracks, and the 457b should have considered your PSO exception.
Good luck.
If I file the form 5329, there does seem to be the exact code for my situation. code 01 does have the public safety exception in it.
Does the IRS just believe me when I say that I am public safety? or will they audit me and make me prove it?
Does it sound correct that Empower cant amend the 1099-R?
K.I.S.S.- Keep It Stupid Simple
Re: 457 withdrawal getting early withdrawal penalty
Most likely the IRS will accept "PS" without questioning it. Large amounts of the tax code is just "self reported" and the IRS just generally accepts what is submitted. Only when red flags are raised will they ask (CP2000 notice), and this asking is not an audit.2ball wrote: Mon Feb 03, 2025 1:30 pm
If I file the form 5329, there does seem to be the exact code for my situation. code 01 does have the public safety exception in it.
Does the IRS just believe me when I say that I am public safety? or will they audit me and make me prove it?
Does it sound correct that Empower cant amend the 1099-R?