Can 457 Plans Be Rolled Over to an IRA?
Although most individuals may be familiar with retirement savings tools such as 401(k) and 403(b) plans, less so may be aware of 457 plans – deferred compensation plans which allow employees to invest a portion of their salary before tax.
Governmental and nongovernmental 457 accounts can be converted to an IRA; however, distributions before age 59 1/2 will incur a 10% early distribution penalty, unless an exemption applies.
Pre-tax contributions
Pre-tax contributions can help maximize your retirement savings. They offer an ideal alternative to Roth IRAs, yet can impose restrictions such as not being able to withdraw them without an unforeseeable financial hardship or leaving the employer. You must be at least 59 1/2 before withdrawing these funds.
Most governmental 457 plans allow employees to start saving early, usually three years prior to reaching retirement age, through special catch-up contributions known as catch-up contributions. Non-governmental plans often impose more restrictions, including limited withdrawal options and the risk that their company might fail.
If your 457 account with an employer that doesn’t offer Roth options, converting to a traditional IRA may be the way forward. Vantagepoint provides custodial services specifically tailored for this process and can help ensure you keep the same investments while avoiding early withdrawal penalties – although remember, any income earned within your IRA will still be subject to taxes.
Employer match
Many individuals are familiar with traditional retirement savings tools like IRAs and 401(k) plans; however, others may be less knowledgeable of 457 plans – a form of defined contribution account that allows employees to save pre-tax dollars tax-deferred.
457 plans provide more than investment options; they also feature an Automatic Cost-of-Living Adjustment feature which automatically increases periodic payments when cost of living expenses rise. Participants may borrow up to 50 percent of their vested balance. When considering moving money between accounts, participants should carefully consider fees, commissions and trading expenses when making this decision.
457(b) plans may be converted to an IRA when their participant no longer works with the employer that sponsors them, unlike 401(k) and 403(b) plans which can be transferred without employer sponsorship – with exceptions being made if an employee moves onto another governmental organization.
Conduit IRAs
A conduit IRA is a traditional IRA designed to act as a temporary repository for withdrawals from other retirement plans, but does not count toward your annual contribution limit or tax advantages. A conduit IRA can be useful if you intend on changing jobs; however, please be aware that any funds transferred over should never be returned into their original retirement accounts, otherwise its tax advantages would be lost and any tax advantages lost as well.
The IRS provides this option to help you withdraw your account balance without incurring the 10% early-withdrawal penalty. You can use it to transfer assets from 403(b) and 457 plans with limited investment options, or move IRA assets directly into new employer’s plans – though before doing this it is wise to seek advice from both legal and financial advisors first.
Withdrawals
457 plans offer similar advantages as 401(k)s by enabling employees to save for retirement with pretax dollars and offering tax-deferred investment structures, meaning earnings on investments won’t become taxable until withdrawal occurs.
However, these plans can have certain restrictions, including withdrawals that must only occur at certain times or circumstances. For example, participants in 457 plans can only withdraw funds during unforeseeable emergencies or when leaving an employer.
457 plans typically offer more limited investment choices than IRAs; participants are only typically permitted to invest in annuities or mutual funds within their plan and may incur higher fees on such investments. When retiring, however, you can roll over those assets into traditional IRA accounts like the ICMA-RC Vantagepoint Traditional IRA which offers multiple investment choices; it would be wise to consult a tax or legal adviser first though before proceeding with this process.
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