Can I Transfer My 457 to a Roth IRA?

Can I transfer my 457 to a Roth IRA

A 457 plan is a type of nonqualified deferred compensation retirement account offered to some governmental and certain nongovernmental employers. Similar to 401(k), employees can defer pretax income into their 457 plans so earnings grow tax-deferred.

Can money be moved between these plans? Yes. A 457 plan offers both Roth and non-Roth plans that enable after-tax contributions and withdrawals, so yes it may be.

Taxes

457(b) accounts differ from 401(k) plans by accepting contributions from both employers and employees, without annual contribution limits applying solely to employee deferrals plus employer matches. Furthermore, workers can make catch-up contributions three years before their “normal retirement age,” typically defined in the plan document.

At the time of deposit, investments made into a 457 account are generally not subject to taxes at ordinary income rates; however, distributions made from it will likely be taxed at ordinary rates when distributed from it. Furthermore, early withdrawals could incur penalty taxes unless certain criteria are met.

Participants enrolled in governmental 457(b) plans can roll eligible distributions over to either a Roth IRA or designated Roth account within their same plan if this allows it. Otherwise, all money rolled over must be distributed at ordinary income tax rates and may incur a 10% penalty if under age 59.5.

Withdrawals

A 457 allows public employees to defer part of their paychecks on a tax-advantaged basis in order to lower taxable income while saving for retirement. Once an employee retires, any earnings remain in their account and are withdrawn as per normal income taxes.

These accounts also allow “hardship withdrawals” without penalty in cases of medical expenses, funeral costs, unforeseen emergencies and property losses. Any amounts withdrawn before age 59 12 will generally incur ordinary income taxes and an additional 10% penalty, unless an exception applies.

As is true with other plans such as 401(k), 403(b), and 457, the 457 also comes in a Roth variant which enables participants to save after-tax dollars for retirement savings. While accessing your money early may tempt you, doing so could jeopardize retirement savings and trigger required minimum distributions (RMDs), which are subject to income taxes – so converting to a Roth IRA instead might make more sense.

Rollovers

As they move away from an employer, participants may wish to rollover assets from their 457 plan into another retirement account. The IRS provides an exhaustive list of accounts eligible for rollover; including traditional and Roth IRAs, pre-tax 403(b) accounts and designated Roth plans.

Direct transfer is the preferred means of transitioning funds from a 457 plan into an IRA account, since this route does not involve distributions and tax liabilities associated with in-service distributions. A direct rollover may only begin once all your money has been transferred over into another plan or IRA account.

Converting tax-deferred accounts into Roth IRAs may not always be the optimal strategy, unless future income tax rates will be considerably lower than current ones. Conversion can eat away at your earnings and diminish returns significantly. A better approach might be taking advantage of multiple retirement accounts to diversify assets across both tax-efficient accounts.

Conversions

As its name implies, a 457 plan offers pretax savings while Roth IRAs allow tax-free distributions. Converting between them is possible but Uncle Sam requires you to pay taxes on it; to minimize your tax obligations during conversion make your conversion in years when your income tax bracket is low.

Your employer-sponsored 457(b) plan allows for rolling over of all or part of its distributions into a Roth IRA; however, you cannot roll them over from a 457(f) plan or in-plan Roth 457(b) account.

Your 457(b) account could also be converted to an annuity that provides tax-free withdrawals over your lifetime. Check with your retirement plan provider to determine whether this option is available, if so you should consider getting an online life insurance quote to cover potential death benefits that are likely lower than accumulated retirement account values.


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