A 457 beneficiary lump sum option is available for designated beneficiaries of participants in a 457 plan.
How a 457 Works
A 457 plan works much like a 403(b) program. The participant decides how much income to invest. But with all the diverse retirement plans available, knowing how they work can be confusing. Often the person participating in the plan gains a working understanding of how their plan works with help from the provider. But it's also important to understand how the retirement plan works for the designated beneficiary. What happens in the event of the participant's death? If you are the beneficiary of a 457 plan, know the specific arrangements that have been made. Will you want to cash in and take a 457 beneficiary lump sum or not?
A 457 plan is a non-qualified tax-deferred compensation plan. It is funded through a group annuity. As part of a retirement plan, these variable annuities are planned long-term investments. When disbursements are made from the annuity they will be taxed as income. What you'll need to know is whether your 457 plan is a defined contribution plan or a defined benefit plan. How are payments determined and would it be wise to accept a 457 beneficiary lump sum? Do you want supplemental payments that compliment Social Security?
Establishing a 457 Plan
457 plans can be establish by employers who are delineated as:
- Subdivisions of states
- Instrumentalities or political subdivisions of states
- Governmental unit exempt from federal income taxes
As a deferred compensation plan, a 457 is available to the above governmental employers which includes public schools.
Defined Contribution Plan
A defined 457 contribution plan has a separate account to which the participant makes contributions based on a formula and are made through elective deferrals, while non-elective contributions can be made by the participant's employer. Benefits to be paid are based on the amount credited to the account when the participant decides to start receiving benefits.
Defined Benefit Plan
A defined 457 benefit plan does not depend on amounts credited to the retirement account. Benefits in this case are established by a pre-determined benefit formula. This type of plan offers more benefit security overall in type of poor investment performance. With this additional security retirement benefits are not diminished.
Withdrawing Fund from a 457
457 plans are set up as a source of retirement income. Three types of withdrawals are available for participants to choose from:
- Single Sum Withdrawals -- Single sum withdrawals lets a participant receive a portion of the 457's balance. The remaining funds are still protected by their tax-deferred status
- Lump Sum Withdrawals -- Allows the participant to withdrawal the entire balance of the 457 account in one payment.
- Systematic Withdrawals -- Arranges a payment of a specific amount according to a specified schedule
457 Beneficiary Lump Sum
If you are the designated beneficiary of a 457 plan ant the participant dies, you'll receive benefits based on the terms outlined in the plan. If you as the beneficiary are the participant's spouse you will not be required to receive payments any sooner than the schedule dictates. If the participant had already been receiving regular payments, benefits will be distributed in the same manner to the beneficiary.In order to receive benefits from a 457 Plan, the designated beneficiary must fill out a Death Benefit Claim Form to request payment. Although you may not feel like dealing with paperwork at a time of emotional stress, take into consideration that it could take from 6-8 weeks after the form is received for you to receive your money.
If you request a 457 beneficiary lump sum payment, you'll receive the entire benefit in one payment. In the case of accounts with balances less that $5,000 your benefit will automatically be sent to you in a lump sum.