On my previous post, I talked about making a hardship withdrawal on your 401k and 403 (b) but now letâ€™s take a look at the 457 retirement plan, which is a deferred contribution retirement plan for the government employees.
It should be noted that some government employees may actually have both the 401(k) plan and 457 retirement plan at the same time, so this may be a big issue as to where to make the hardship withdrawal from: the 401(k) or the 457.
Making a hardship withdrawal from your 457 retirement plan is quite different than making a hardship withdrawal from your 401(k) plans. Â It usually differs with the requirement as it is more stringent in the 457 than the 401(k). Under the 457 plan, a hardship withdrawal can only happen if you are faced with an unforeseeable emergency. You see, with a 401k plan, you can make a hardship withdrawal as long as it qualifies as financial need, even if itâ€™s foreseeable.
So letâ€™s see what the IRS says about the unforeseeable emergency.
An unforeseeable emergency is defined by the IRS as a severe financial hardship resulting from an illness or accident, loss of property due to casualty, or other similar extraordinary and unforeseeable situations arising as a results of events beyond your or your beneficiaryâ€™s control.Â The following are examples of unforeseeable events:
- Imminent foreclosure on your principal residence
- Imminent eviction on your principal residence, which includes your home or rented apartment
- Medical Expenses
- Burial or funeral expenses
Events that would normally qualify under the 401k or 403b plan but would not qualify under the 457 retirement plans are:
- Payment of college tuition and related educational expenses
- Purchase of your principal residence.
Whether you or your beneficiary is faced with an unforeseeable emergency really depends on the facts and circumstances. However, a withdrawal is not an account of an unforeseeable emergency to the extent that the emergency can be relieved through reimbursement or compensation from insurance, liquidation of your assets, or cessation of deferrals under the plan.
In addition, the hardship withdrawal must not exceed the amount reasonably necessary to satisfy the emergency need.
Consequences of Taking A Hardship Distribution
As with the 401k plans, taking a hardship distribution from your 457 retirement plans comes with the following consequences that you should know about:
- You lose the opportunity for growth of your retirement plan.
- You still pay the 10% early withdrawal penalty if you are doing it before the age 59.
- Your withdrawal is included in your gross income, which means it is also taxable. It may also put you into a higher tax bracket and pay a higher tax rate.
- You are not allowed to make any contribution to your 457 retirement plan or any other retirement plan for six months