Can 457 Plans Be Rolled Over to an IRA?

457 plans are retirement accounts often available to government and certain non-profit employees that allow for an upfront tax deferral of investment income; withdrawals will still be taxed at regular income rates in the future.

Many plans impose fees that can significantly eat away at savings. IRAs generally charge lower management fees.

Contribution Limits

457 plans provide employees with another investment option similar to 401(k). They allow them to put away some of their pay in tax-deferred accounts where money can grow tax free until being withdrawn at retirement age.

An annual contribution limit for 457 plans (which include both employer and employee contributions) is $22,500 annually; it may be increased through cost-of-living adjustments; additionally, participants aged 50 or above have access to special catch-up allowance.

Participants of a 457 plan may withdraw funds tax-free provided they’re at least 59 1/2 years old and experience an unforeseeable financial emergency, such as paying medical expenses, funeral costs or purchasing their first home.

Before pursuing an in-service withdrawal or rollover, it’s wise to consult a financial advisor who understands both options in detail. They can assist with understanding both outcomes.

Taxes

Similar to 401(k) plans, 457 plans allow employees to invest a portion of their salary pretax and then watch it grow tax-deferred until retirement is reached, at which time it must be withdrawn and subject to regular income taxes.

When participants convert their 457 account balance into an IRA, it won’t incur the 10% early withdrawal penalty even if they are still working and under age 59 1/2. But if they convert into a Roth IRA instead, any investment earnings versus tax-deferred contributions will be subject to regular income taxes at conversion.

An important element to keeping in mind when rolling over 457 funds into an IRA is which type of IRA to select. Traditional IRAs offer tax-deferred growth potential while Roth IRAs allow for tax-free distributions in retirement – your RBC Wealth Management Financial Advisor can help you select the most appropriate option based on your individual situation.

Rollover Options

A 457 plan is a tax-favorable deferred compensation plan specifically tailored to government employees and nonprofit organizations. Non-governmental 457 plans offer more flexibility than 401(k) and other savings accounts by permitting participants to withdraw contributions at any time without incurring an early withdrawal penalty of 10%.

Readers employed at state university hospitals may want to consider rolling their 457 balance into an IRA as soon as they leave or retire; it allows for tax savings should their income tax bracket rise post-retirement. This step could allow them to avoid tax penalties when taking distributions out.

However, the IRA that he rolls over into may not be the optimal place for him to keep his money. If he currently falls within the 40% combined federal and state marginal tax bracket, Roth conversion could add an additional $20,000 tax bill ($50,000 multiplied by 20%). A financial advisor can evaluate his options and recommend an approach best suited to him.

Limitations

Although 457 plans can provide tax-deferred savings opportunities, they do have their limitations. Fees may quickly eat into returns; vendor, brokerage, advisor, record-keeping and custodial charges all add up. If these fees seem unreasonable to you, consider changing vendors.

A 457 plan offered by government employers allows workers to save additional funds for retirement in addition to the annual limit, by making “catch-up” contributions in one or more of the three years prior to normal retirement age as set by their plan. This option can be especially helpful for those starting careers later in life.

Before choosing to invest in a 457 plan, it’s essential to carefully weigh its tax savings against its limited investments and withdrawal options. If it seems inadvisable for you, then rolling over into an alternative 401(k) or IRA when leaving your job might make more sense.


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