Can I Transfer My 457 to a Roth IRA?

A 457 plan is a retirement savings account available to public employees such as teachers and other public service workers. It allows workers to save pretax contributions before reaching retirement age; participants may even make catch-up contributions three years ahead.

Our reader wants to know if it would make sense for him to convert his $50K 457 into a Roth IRA, depending on their circumstances and tax bracket. The decision ultimately rests with him alone.

Taxes

A 457 plan and Roth IRA provide two different ways of saving tax-efficiently for retirement. Roth IRAs permit distributions tax-free if certain criteria are fulfilled, while traditional IRAs require pretax deductions and taxes when gains are distributed.

These plans can work together to provide a balanced mix of tax-exempt and taxable income in retirement. A financial professional can assist you in determining whether converting assets to a Roth IRA makes sense in light of your individual circumstances.

Converting from a 457 plan to a Roth IRA incurs both federal and state taxes; however, you can lower this impact by spreading out the conversion over multiple years or waiting until you are in a lower tax bracket. A financial professional can assist in modeling potential impacts with NewRetirement Planner.

Withdrawals

A 457 plan provides pretax savings while Roth IRAs offer tax-free distributions. When moving money between accounts, taxes will be due on any amount converted at once – it would be wiser to do it when your income is lower if possible.

Rollover funds from your 457 plan into an IRA, Roth IRA, 401(k), 403(b) or another government 457(b) account so your assets continue to accumulate tax-deferred until you need them – no count toward annual contribution limits!

Only eligible distributions from a 457(b) plan can be converted to another plan; hardship withdrawals do not qualify, nor are required minimum distributions eligible for rollover. This may include cash distributions or annuity payouts you received from your 457(b), with cash or property included; any such rollover must not include different property than what was contained within its distribution.

Conversions

If you are a participant of a 401(k), 403(b), or 457(b) plan, eligible distributions can be transferred directly into either a Roth IRA or designated Roth account within your employer’s plan (if it allows this). Your money will then have access to all of the same investment options and fees that would apply otherwise to this type of account or plan.

Roth IRAs are after-tax retirement accounts that allow tax-free withdrawals in the future. You must pay taxes when moving money from tax-deferred accounts like 457(b) plans into Roth IRAs; to lower your total tax bill it is wiser to perform this conversion during years when your income tax rate will be lower; alternatively you could perform a “backdoor Roth conversion”.2

Investments

Roth IRAs provide an ideal place for you to save for retirement because the funds in it can be utilized tax-free. But there are a few things you should keep in mind.

Understand the differences between a rollover and contribution before initiating either one. A rollover involves moving funds from one account to another while contributions involve depositing new funds into an existing one.

Once you leave your former employer, you are only eligible to transfer a 457 into another tax-deferred account at another institution such as another 457(b), an IRA, 403(b) or 401(k).

When receiving your distribution, any applicable taxes may be withheld from the check. It’s essential that this amount be deposited into a new account within 60 days to allow its tax-deferred status.