Advanced Underwriting Consultants

Ask the Experts – March 14

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question: My client has a governmental 457(b) account to which he rolled over funds from his former employer’s retirement account. Under the old plan, he could receive distributions after he reached age 59 ½, but under his current 457(b) plan, he cannot access the funds until he is age 70 ½. If the rollover amounts are separately accounted for in the 457(b) plan, can my client still access the rolled over funds after he reaches age 59 ½?

Answer: Yes, he can access the rollover contributions prior to age 70 ½ as long as the governmental 457(b) plan documents allow it.

The general rule is that 457(b) accounts cannot be accessed until the participant:

  • Reaches age 70 ½;
  • Stops working with the employer; or
  • Is faced with an unforeseeable emergency.

However, the IRS issued Revenue Ruling 2004-12, holding that the restrictions on distributions do not apply to rollover contributions:

If the receiving plan is a § 457 eligible governmental plan or a tax-sheltered annuity described in § 403(b)(7) or (11), amounts attributable to rollovers that are maintained in separate accounts are permitted to be distributed at any time even though distribution of other amounts under the plan or contract is restricted pursuant to § 457(d)(1)(A) and § 403(b)(7) or (11), respectively (emphasis added).

Therefore, the client could receive a distribution of that money prior to age 70 ½ (or severance from employment or an emergency). However, keep in mind that the 10-percent penalty under section 72(t) still applies if your client is younger than age 59 ½.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.