Under the State of Illinois deferred compensation withdrawal rules, once you separate from state service you can take money out of your 457(b) account at any age without the 10% federal early-withdrawal penalty that applies to 401(k) and IRA distributions.1Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions You’ll owe ordinary federal income tax on what you withdraw, but Illinois does not tax these distributions at all.2Illinois Department of Central Management Services. Deferred Compensation While you’re still employed by the state, access is far more restricted.
When You Can Take a Withdrawal
The main event that opens the door is separation from state service. Retirement, resignation, and termination all count. After you separate, there is no minimum age. Someone who leaves state employment at 45 can begin distributions immediately and owe only regular income tax on the amount taken.1Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
You choose the payout shape when you file the distribution request through Empower, the plan’s recordkeeper. Lump sum, partial withdrawal, and periodic payments are all available. Confirm your mailing address and beneficiary information on file before you submit, because incomplete paperwork is the usual reason a distribution stalls.
p>If you’re still working for the state, you cannot simply request a withdrawal. Your options while employed are narrower: an unforeseeable emergency distribution, a plan loan, or one of the small-dollar distributions that SECURE Act 2.0 allows plans to adopt. Each is covered below.
Federal and Illinois Taxes on Your Distribution
Every dollar of pre-tax contributions and earnings you withdraw is taxed as ordinary federal income in the year you receive it. A large lump sum can push you into a higher bracket for that year, which is the main reason many participants spread withdrawals across multiple years or time larger distributions for years when their other income is lower.
Illinois does not tax distributions from the plan. The Department of Central Management Services states directly that “The funds are never taxed by the State of Illinois.”2Illinois Department of Central Management Services. Deferred Compensation The exemption applies regardless of your age or reason for the withdrawal, so long as you remain an Illinois resident when you take it.
The 10% Penalty and Its One Exception
Governmental 457(b) distributions taken after separation from service are not subject to the 10% additional tax that hits early distributions from 401(k)s, 403(b)s, and IRAs. There is one carve-out. If you previously rolled money into your 457(b) from a 401(k), a 403(b), or a traditional IRA, the portion attributable to those rollovers keeps its original character. Withdraw that piece before age 59½ and the 10% penalty applies to it.1Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions The plan tracks rolled-in balances separately, so this affects only the rollover portion, not the contributions you made through payroll.
Getting Money Out While Still Employed
Unforeseeable Emergency Withdrawals
If you’re still on state payroll, the primary way to reach your 457(b) is an unforeseeable emergency distribution. The IRS defines this narrowly. You must show severe financial hardship from circumstances beyond your control, and you can only withdraw enough to cover the emergency after other resources, such as insurance proceeds or liquidating other assets, have been used.
The IRS has identified expense categories that can qualify:3Internal Revenue Service. Unforeseeable Emergency Distributions From 457b Plans
- Medical expenses from illness or accident affecting you, your spouse, or your dependents
- Property damage from a casualty such as a natural disaster, not fully covered by insurance
- Funeral costs for a spouse, dependent, or close family member
- Imminent foreclosure or eviction from your primary residence due to circumstances you didn’t create
Paying off credit card debt does not qualify, because it doesn’t arise from extraordinary circumstances beyond your control.3Internal Revenue Service. Unforeseeable Emergency Distributions From 457b Plans Expect to submit documentation covering both the emergency itself and the fact that you’ve looked at other options. Medical bills, insurance denial letters, and foreclosure notices are typical. The plan administrator reviews each request individually.
Plan Loans
The Illinois plan may offer participant loans, which let you use plan funds without triggering a taxable distribution. Federal rules cap the loan at the lesser of 50% of your vested balance or $50,000, and you must repay it within five years through substantially level payments made at least quarterly.4Internal Revenue Service. Plan Loan Failures and Deemed Distributions A loan used to buy a primary residence can have a longer repayment period.
The trap sits at separation. If you leave state employment with a loan still outstanding, the balance typically becomes due right away. If you can’t pay it off, the unpaid amount is treated as a deemed distribution, and you’ll owe income tax on that amount as if you’d taken a withdrawal.4Internal Revenue Service. Plan Loan Failures and Deemed Distributions Anyone weighing a job change should factor an open loan into the decision.
Small-Dollar SECURE 2.0 Distributions
SECURE Act 2.0 created two optional in-service distribution types that governmental 457(b) plans may adopt:
- An emergency personal expense distribution of up to $1,000 per year, taken without the usual unforeseeable emergency documentation.
- A domestic abuse victim distribution of the lesser of $10,000 (indexed for inflation) or 50% of the vested account balance, taken within 12 months of the incident.
Both are optional plan features. Whether the Illinois plan has adopted either depends on plan amendments, so confirm current availability with the CMS Deferred Compensation Office or Empower before counting on them.
Required Minimum Distributions
You have to start taking required minimum distributions by April 1 of the year after you turn 73.5Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs Under SECURE Act 2.0, that age rises to 75 starting in 2033.
If you’re still working for the state past age 73, the plan may permit you to delay RMDs until you actually retire, but only if it has adopted that still-working exception. Check with CMS or Empower before you assume it applies. Annual RMD amounts are calculated from your account balance and IRS life expectancy tables. The penalty for missing an RMD is steep, so treat the deadline as firm.
Rolling Over Instead of Withdrawing
After separation you can roll your balance into another eligible retirement account rather than take a taxable distribution. Governmental 457(b) funds can move into a traditional IRA, SEP-IRA, SIMPLE IRA, another governmental 457(b), a 401(k), or a 403(b).6Internal Revenue Service. Rollover Chart A rollover to a designated Roth account inside a 401(k), 403(b), or 457(b) is available too, but you’ll owe income tax on the converted amount in the year of the conversion.
How you move the money matters. A direct rollover, where the funds go straight from the plan to the receiving account, has no tax withholding. If you take the distribution yourself and try to redeposit it within 60 days, the plan must withhold 20% for federal taxes.7Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions To complete a full rollover you’d have to come up with that 20% from other funds and deposit the entire original amount into the new account within 60 days, or the withheld portion is treated as a taxable distribution.
There’s a strategic point worth weighing before you roll anything out. If you move 457(b) money into a 401(k) or IRA, the funds take on the receiving plan’s rules, including the 10% penalty for distributions before age 59½.8Internal Requestue Service. Retirement Topics – Exceptions to Tax on Early Distributions You give up the penalty-free early access that made the 457(b) distinct. If you expect to draw on the money before 59½, keeping it in the 457(b) is usually the better move.
How to Request a Distribution
Withdrawal requests are handled through Empower, which serves as the plan’s recordkeeper. Submit the distribution request with your personal information, the amount you want, and your chosen payment method. Verify that beneficiary designations and your mailing address are current at the same time, since these are the most common sources of delay.
Beneficiaries and Divorce
Two situations are frequently mistaken for withdrawal questions but follow different rules. A beneficiary receiving the account after a participant’s death has a separate menu of options; a surviving spouse can roll the funds into their own IRA or an inherited IRA, while a non-spouse beneficiary is limited to a direct transfer to an inherited IRA and generally must complete distributions within 10 years under the SECURE Act’s accelerated timeline.9Internal Revenue Service. Safe Harbor Explanations – Eligible Rollover Distributions5Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs The beneficiary form on file with Empower controls who receives the money, and it overrides what your will says, so keep it current after any family change.
In divorce, the account can be divided using a Qualified Domestic Relations Order (QDRO), which is separate from the QILDRO used for Illinois pension benefits.2Illinois Department of Central Management Services. Deferred Compensation A QDRO generally cannot direct payment to an alternate payee earlier than the date the participant reaches “earliest retirement age” under the plan.10U.S. Department of Labor. QDROs – The Division of Retirement Benefits Through Qualified Domestic Relations Orders If your divorce involves both a pension and the deferred compensation account, expect to need both a QILDRO and a QDRO.