Lump-sum distribution from a public school 457(b) prior to age 59 1/2

[Guest STL Cards Fan]

Is a lump-sum distribution received from a school district's 457(B) plan (based on separation of service) prior to the participant reaching age 59 1/2 subject to the 10% early w/d penalty? I'm reading where non-governmental 457's are, but not necessarily governmental plans.

I thought EGTRRA made 457's subject to many gualified plan distribution regs...?

[mbozek]

Distributions from a govt 457 plan are subject to the 10% tax only to the extent they are attributable to a rollover from a qualified plan or 403(B) annuity plan. IRC 72(t)(9). Same exceptions from 10% tax apply to a 457 plan distribution as apply to a qualified plan. Since distributions from a np 457 plan cannot be rolled over to an IRA or qualified plan they are not subject to the 10% tax.

[Guest STL Cards Fan]

Would it make sense then that a governmental entity (public school district) offering a 403(B), AND which has offered a 457(B) plan in the past but has stopped allowing new enrollees beginning with the availability of the 403(B), "dust off" the 457 plan, update the necessary language in the trust agreement, and inform the eligible employees of the heightened benefit that a 457 plan brings with respect to "not being subject to the 10% e/w/d penalty"?

It would appear that, if both plans are available, a participant should exhaust his/her contrib limits to the 457 first, then the 403(B) second. Both allow tax deferral, both don't allow creditors access to funds in case of bankruptcy (assuming state law allows the governmental exemption for the 457 to establish the trust), both have same limits, but 457 allows for potential earlier w/d w/o penalty.

Am I missing something? I'm not an advocate either way at this point, I just want to make sure the information being given out by the investment vendors to my clients is accurate...albeit somewhat biased.

Any and all thoughts are appreciated!

[mbozek]

for employees with 15 years of service, 403(B) tax deferral is $3000 more than 457 limit under IRC 402(g)(8). 457 plan deferrals are not eligible for loans while a participant can borrow up to $50,000 from a 403(B) plan. 457 plan can accept deferral of vacation or sick pay. 403(B) investaments are limited to mutual funds and annuity contracts while 457 plan can invest in virtually any assets.