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FILE - This March 22, 2103 file photo shows the exterior of the Internal Revenue Service building in Washington.

When it comes to retirement plans, 401(k)s and 457s are common types of accounts, but questions can arise. This week, CPA Gregory Burke of Sacramento, Calif., and certified financial planner Kimberly Foss of Roseville, Calif., offer some guidance.


Question: I took a 457 withdrawal of $50,000. The IRS wants me to pay $20,000 in penalties, which is almost half of what I took out. How do I put in a stress claim?

Answer: A 457 plan is a deferred compensation retirement plan usually sponsored by government entities, such as a federal or state agency.

Assuming you received a distribution from a 457 plan, that distribution would be subject to federal income tax withholding, but not “penalties.” The rules require that 10 percent of non-periodic distributions (i.e., a one-time distribution as opposed to regular, monthly payments) be withheld for federal income tax. If the distribution is a rollover distribution, 20 percent must be withheld.

Generally, you cannot receive distributions from a 457 plan until you reach age 70 1/2, have severance from employment, or face an unforeseeable emergency. Unforeseeable emergencies include: imminent foreclosure or eviction from your primary residence; medical expenses; and some funeral expenses.

There is no “stress claim” provision that eliminates the income tax on a distribution from a 457 plan.

Because contributions to 457s are made using pre-tax dollars, you will have to pay federal and, most likely, state income tax on any distribution. That’s true whether the funds are withdrawn for an emergency or at the regular age of 70 1/2.

When rolling over a 401(k) into an IRA and the amount is more than $500,000, should the money be divided between institutions to be sure it’s covered by insurance, in case the institution goes under? Fidelity says anything over that amount is covered by an insurance policy from Lloyds of London. Is that sufficient or should the money be rolled into two or three IRAs at different companies?

If you are housing your investments with Fidelity, I would follow its guidelines. If Fidelity states that all amounts over $500,000 are covered by an insurance policy, then your IRA should be safe with the company.

Somewhat similar to FDIC insurance for bank accounts, investors’ assets are covered — in certain circumstances — by the nonprofit Securities Investor Protection Corp., which is a federally required program. (Note: SIPC is not a federal government agency but is funded by its member brokerage firms.)

It is important to remember that SIPC does not provide protection against stock market declines or poor investing choices. Its primary duty is to protect investors against financial harm by helping those whose money, stocks or securities were stolen by a broker or whose brokerage firm goes into bankruptcy or other failure.

Currently, SIPC coverage is up to $500,000 per customer, including $250,000 in cash. If your accounts exceed those limits, most brokerage houses carry supplemental private insurance (in your case, Lloyds of London).

Some assets, such as futures contracts, are not covered by the SIPC, so be sure to ask Fidelity exactly which of your assets are covered. To further ensure your money is safe, ask your financial adviser to review your account and Fidelity’s guidelines.


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