Can 457 Plans Be Rolled Over to an IRA?
The 457 plan is a tax-advantaged savings scheme available to government and certain non-profit employees. Similar to 401(k), funds will be deducted directly from paychecks and then invested in investment accounts under your control.
Many individuals may want to move their 457 accounts into an IRA to consolidate their retirement assets; however, it’s essential that they fully comprehend any implications associated with such a decision.
Taxes
One key distinction between 457 plans and other retirement accounts is that you do not need to wait until age 59 1/2 before withdrawing funds from them, which could be an advantage or disadvantage depending on other sources of income to pay any tax bills associated with an early withdrawal of funds.
As with any withdrawals, some withdrawals may incur taxes and penalties; for example, lump sum distributions are immediately taxable with mandatory federal and state income tax withholding of 20% applicable for federal withholding tax purposes.
Rolling your 457 plan into an IRA allows you to avoid taxes and penalties by moving assets into tax-deferred accounts. Done properly, this process can also consolidate multiple retirement accounts into one portfolio that’s easier for tracking performance and managing allocations.
Fees
A 457 plan is an employee retirement savings account similar to 401(k)s or 403(b). Like these other plans, 457s may be maintained by both government-affiliated as well as nongovernmental tax-exempt organizations; governmental plans may have different rules and regulations than nongovernmental ones but generally follow the same rollover guidelines as IRAs and qualified retirement plans such as 401(k).
Fees associated with 457 plans can differ widely depending on the size of the fund. Smaller funds may require higher management fees as providers need to make a profit on each participant.
Rollover to an IRA offers greater flexibility and greater investment options compared to what most 457 plans can provide, as well as simplifying financial planning by consolidating assets. Unfortunately, such funds become subject to RMD (required minimum distribution) rules which dictate they be taken out every year beginning at age 72, subject to penalties if you withdraw early.
Distributions
Similar to 401(k) plans, 457 plans enable participants to save pre-tax funds that aren’t subject to federal income tax until withdrawal. A participant may roll these funds over into another tax-deferred account such as an IRA or another 457(b) plan as well as traditional and Roth IRAs, 403(b), or 401(a).
Rolling over a 457(b) into an IRA not only expands investment options but can help streamline retirement planning and consolidate assets, particularly beneficial to those experiencing job changes or approaching retirement age. This can be especially advantageous when changing jobs or reaching retirement age.
Rollover from 457(b) to IRA requires compliance with RMD rules (required minimum distributions). Therefore, it’s advisable to consult a financial expert regarding an ideal asset allocation post-457(b) rollover in order to make sure your overall portfolio remains properly diversified.
Conversions
Some 457 plans provide unique investment structures that may not easily transfer over to an IRA account, and others have different withdrawal restrictions than standard IRA investments. A Northwestern Mutual financial advisor can help simplify retirement savings by consolidating retirement accounts and developing an appropriate savings strategy tailored to your situation.
Before initiating a rollover, it’s essential to fully comprehend its tax implications. In most cases, a 401(k) and IRA rollovers will not incur taxes; however, 457(f) and SERP rollovers could have differing tax implications.
Government 457(f) plans offer catch-up contribution options that enable employees approaching retirement age to save an additional $6,500 every year. Any withdrawal before age 59 1/2 would constitute an early withdrawal with penalties up to 10% applied as early withdrawal penalties. Roth IRA conversion is another potential solution but this decision should take into account both your tax bracket and retirement goals before making this move.
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