Clarification ref Governmental 457b distributions

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Madbull
Posts: 83
Joined: Thu Sep 26, 2013 11:01 am

Clarification ref Governmental 457b distributions

Post by Madbull » Sun Aug 12, 2018 8:56 pm

Quick question for those familiar with governmental Roth 457b plans.....

I’ve been reading up, and just want to be sure I understand something.

I’m eligible to retire in 8 years at age 47, (after 28 total years of service), though I’ll likely stay till 52, or 55 at the latest. If I start taking distributions from my Roth 457b at that time, then I get to avoid the 10% penalty since I’ll have met my plan requirements. In addition, my disbursement portion from my contributions will be tax free. However, I will owe taxes on whatever portion of my payments come from my earnings, correct?

Ie; if I take 12k/year out, and 2k of that is deemed to be from earnings, I’d only be taxed on that 2k. (At least until I’m 59.5).

Alternatively, if I did 12k from the non-Roth portion of my 457b, I’d still avoid the 10% penalty, but would be taxed on the entire distribution.

Do I have that right?

Related - I’m assuming the 1099R I’d get from the provider will breakdown the respective amounts come tax time?

User avatar
sergeant
Posts: 934
Joined: Tue Dec 04, 2007 11:13 pm

Re: Clarification ref Governmental 457b distributions

Post by sergeant » Sun Aug 12, 2018 10:20 pm

No, that's incorrect. You will owe no taxes on any part of the Roth portion. You have already paid those taxes.


The non Roth 457b will be considered income for tax purposes.
Lincoln 3 EOW!

Madbull
Posts: 83
Joined: Thu Sep 26, 2013 11:01 am

Re: Clarification ref Governmental 457b distributions

Post by Madbull » Mon Aug 13, 2018 12:26 am

That’s what I had thought, but googling leads to to some stating the same, and others, like State if Nevada’s 457b saying the opposite. Snipet from that site: ( http://defcomp.nv.gov/Resources/FAQ-Roth_457/ ).

“How can I be assured I’ll receive a Roth 457(b) distribution tax-free?

Generally, you must be separated from service to receive a distribution. In order to ensure the distribution is tax-free, it must be a ‘qualified’ distribution. A qualified distribution must meet the following two conditions:
Roth contributions must be held in the account for five consecutive years after the first contribution is made; and
You must be at least age 59½ the year you take the distribution.

How are Roth 457(b) distributions taxed if they are not qualified?
If a distribution is not ‘qualified’, the portion of the distribution attributable to the Roth contributions, termed ‘basis’ by the IRS, is not taxable since it was taxed at the time it was contributed to the Plan. The earnings portion (if any) is taxable. The allocation between the basis and taxable earnings is determined on a pro-rata basis when distributed. For example, if a non-qualified distribution of $5,000 is made from your Roth account when the account consists of $9,400 of Roth contributions and $600 of earnings, the distribution consists of $4,700 Roth contributions and $300 of earnings.”

Spirit Rider
Posts: 8905
Joined: Fri Mar 02, 2007 2:39 pm

Re: Clarification ref Governmental 457b distributions

Post by Spirit Rider » Mon Aug 13, 2018 8:59 am

457b withdrawals are "penalty-free", but are subject to the underlying taxation. This means that traditional (pre-tax) 457b distributions are 100% subject to ordinary income tax.

Unlike a Roth IRA where there are ordering rules allowing contributions and 5+ year conversions to come out tax-free. Non-qualified withdrawals from a Roth employer plan are made pro-rata with the pro-rated earnings subject to ordinary income tax.

User avatar
iceport
Posts: 4008
Joined: Sat Apr 07, 2007 4:29 pm

Re: Clarification ref Governmental 457b distributions

Post by iceport » Mon Aug 13, 2018 10:32 am

Spirit Rider wrote:
Mon Aug 13, 2018 8:59 am
Unlike a Roth IRA where there are ordering rules allowing contributions and 5+ year conversions to come out tax-free. Non-qualified withdrawals from a Roth employer plan are made pro-rata with the pro-rated earnings subject to ordinary income tax.
Interesting, Spirit Rider, thanks for the info. I never used my Roth 457b option, but I never even knew about this aspect when I was deciding.

To the OP, the only thing I'd like to add is that you really should obtain and refer only to your own 457b plan document. Unlike IRAs and even 401ks and such, some 457b plan provisions can vary from plan to plan.
"Discipline matters more than allocation.” ─William Bernstein

User avatar
sergeant
Posts: 934
Joined: Tue Dec 04, 2007 11:13 pm

Re: Clarification ref Governmental 457b distributions

Post by sergeant » Mon Aug 13, 2018 12:34 pm

Spirit Rider wrote:
Mon Aug 13, 2018 8:59 am
457b withdrawals are "penalty-free", but are subject to the underlying taxation. This means that traditional (pre-tax) 457b distributions are 100% subject to ordinary income tax.

Unlike a Roth IRA where there are ordering rules allowing contributions and 5+ year conversions to come out tax-free. Non-qualified withdrawals from a Roth employer plan are made pro-rata with the pro-rated earnings subject to ordinary income tax.
Spirit Rider is correct. I was incorrect. I thought once the 5 years were reached you were good to go on the entire portion of the Roth withdrawal being tax free. You also must be 59.5 years old.
Lincoln 3 EOW!

Spirit Rider
Posts: 8905
Joined: Fri Mar 02, 2007 2:39 pm

Re: Clarification ref Governmental 457b distributions

Post by Spirit Rider » Mon Aug 13, 2018 12:36 pm

That is good advice in general, but plan provisions can not override tax law.

Madbull
Posts: 83
Joined: Thu Sep 26, 2013 11:01 am

Re: Clarification ref Governmental 457b distributions

Post by Madbull » Tue Aug 14, 2018 12:28 pm

Thanks for the info folks, it's appreciated.

UniversityEmployee9
Posts: 104
Joined: Wed Mar 18, 2015 10:01 am

Re: Clarification ref Governmental 457b distributions

Post by UniversityEmployee9 » Tue Aug 14, 2018 12:36 pm

sergeant wrote:
Mon Aug 13, 2018 12:34 pm
Spirit Rider wrote:
Mon Aug 13, 2018 8:59 am
457b withdrawals are "penalty-free", but are subject to the underlying taxation. This means that traditional (pre-tax) 457b distributions are 100% subject to ordinary income tax.

Unlike a Roth IRA where there are ordering rules allowing contributions and 5+ year conversions to come out tax-free. Non-qualified withdrawals from a Roth employer plan are made pro-rata with the pro-rated earnings subject to ordinary income tax.
Spirit Rider is correct. I was incorrect. I thought once the 5 years were reached you were good to go on the entire portion of the Roth withdrawal being tax free. You also must be 59.5 years old.
I thought you could make qualified withdrawals upon separation from the employer before 59.5 with a 457b? Is the rule different for the Roth version?

Spirit Rider
Posts: 8905
Joined: Fri Mar 02, 2007 2:39 pm

Re: Clarification ref Governmental 457b distributions

Post by Spirit Rider » Tue Aug 14, 2018 6:19 pm

UniversityEmployee9 wrote:
Tue Aug 14, 2018 12:36 pm
I thought you could make qualified withdrawals upon separation from the employer before 59.5 with a 457b? Is the rule different for the Roth version?
As I already said; 457b withdrawals are not "qualified" withdrawals, they are "penalty-free" withdrawals. Traditional 457b withdrawals are subject to ordinary income tax and Roth 457b withdrawals are subject to Roth qualification status. However, they are both exempt from the 10% early withdrawal penalty.

See Form 1099-R Instructions, Box 7 Code 2—Early distribution, exception applies.
  • A governmental section 457(b) plan distribution that is not subject to the additional 10% tax. But see Governmental section 457(b) plans, earlier, for information on distributions that may be subject to the 10% additional tax.

nwffdiver
Posts: 113
Joined: Mon Oct 01, 2012 9:26 pm
Location: End of the Oregon trail

Re: Clarification ref Governmental 457b distributions

Post by nwffdiver » Tue Aug 14, 2018 6:33 pm

Spirit Rider wrote:
Tue Aug 14, 2018 6:19 pm
UniversityEmployee9 wrote:
Tue Aug 14, 2018 12:36 pm
I thought you could make qualified withdrawals upon separation from the employer before 59.5 with a 457b? Is the rule different for the Roth version?
As I already said; 457b withdrawals are not "qualified" withdrawals, they are "penalty-free" withdrawals. Traditional 457b withdrawals are subject to ordinary income tax and Roth 457b withdrawals are subject to Roth qualification status. However, they are both exempt from the 10% early withdrawal penalty.

See Form 1099-R Instructions, Box 7 Code 2—Early distribution, exception applies.
  • A governmental section 457(b) plan distribution that is not subject to the additional 10% tax. But see Governmental section 457(b) plans, earlier, for information on distributions that may be subject to the 10% additional tax.

This is good to know. I was under the impression that all 457b plan could be accessed before 59 1/2 as many employees that have them can retire early ( like myself). Sounds like since the Roth 457 is relatively new, it has different rules, as Spirit Rider showed. My plan doesn’t even have a Roth option..

:sharebeer

Spirit Rider
Posts: 8905
Joined: Fri Mar 02, 2007 2:39 pm

Re: Clarification ref Governmental 457b distributions

Post by Spirit Rider » Tue Aug 14, 2018 6:46 pm

They can all be accessed before 59 1/2, just with applicable taxation.

Post Reply