Can 457 Plans Be Rolled Over to an IRA?
A 457 plan allows employees to set aside part of their wages, which can then be transferred into an IRA when employment ends.
Rollover into an IRA may also make sense if your marginal tax rate will likely be higher upon retirement. But keep in mind some important details.
Taxes
At his current tax rate of 40%, rolling over $50,000 from a 457 plan will result in a taxable distribution of $20,000.
Answer depends on whether a plan is Governmental or Non-Governmental 457. Governmental plans contain withdrawal rules which only permit participants to access funds after departing employment or when an “unforeseeable emergency” arises, such as illness, accident, loss of property due to casualty etc. Unforeseeable emergencies include serious financial hardship due to illness, accident or loss caused by circumstances beyond participants control.
Non-governmental 457 plans do not offer these exceptions and their distributions are taxed at withdrawal time as their money belongs to their employer and could potentially be subject to creditors of that employer. Their only recourse would be rolling their assets over into either a traditional or Roth IRA; but this may not always be feasible.
Fees
Governmental 457(b) plans differ significantly from traditional retirement savings accounts like IRAs and 401(k)s in that funds in them cannot typically be withdrawn before leaving your employer, except under unusual circumstances or to cover qualified expenses. Furthermore, with nongovernmental 457(b) plans your money may rank junior to that of other creditors in case your employer declares bankruptcy and your funds could potentially be seized as part of its capital structure.
Due to the restrictions and fees associated with 457(b) plans, most people opt to rollover their money after leaving an employer into a traditional IRA or other tax-qualified retirement account instead of keeping it within them. At ICMA-RC we provide no-fee Vantagepoint Traditional IRA that enables you to maintain current investments options while receiving periodic payments at your convenience – contact us now if you would like more information on rolling over either a government or non-government 457(b).
Withdrawals
Similar to 401(k) plans, 457 plans allow employees to invest a portion of their salary pretax and grow tax-deferred until retirement time when withdrawals may be taken from it.
If an individual opts to convert their 457 plan into an IRA, they will typically receive a check with any taxes withheld from the account and must deposit them within 60 days or they will be considered taxable distributions.
An individual may opt to roll over their 457 plan balance into either a traditional or Roth IRA, 403(b), different government 457 plans, or an ERISA-compliant non-governmental 403(b)/401(k). Each type of IRA chosen could subject your accounts to different rules for investment accounts that result from such actions.
Making the decision to roll over can add additional complexity to your retirement strategy. Brighton Jones can assist individuals in aligning all components of their deferred compensation package with their larger financial picture.
Rollover Chart
A 457 plan can be an attractive retirement solution for many in non-profit and government settings, particularly those employed in these sectors. Offering similar tax-deferred contributions as a 401(k) or 403(b), as well as pre-retirement catch-up options for employees over 50, these accounts offer all of these advantages and more.
Though these plans may appear similar, there are certain distinctions that need to be considered when making rollover decisions. For example, only IRAs do not carry early withdrawal penalties while 457(b) plans generally consist of individual accounts or annuities and require prior employer approval before rolling over funds into another employer’s plan.
Rollovers between spouses should be undertaken carefully as the IRS only permits penalty-free distributions when one account owner separates from service. Furthermore, an IRA might provide more investment options than its 457(b counterpart. Though managing multiple retirement accounts might seem easier at first glance, always consult a financial planner or tax professional prior to making any significant changes.
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