Can I Transfer My 457 to a Roth IRA?
A 457 is a pre-tax retirement savings account designed specifically for public employees that comes with fees such as vendor, record-keeping and advisor charges that could potentially detract from investment returns.
Furthermore, government 457 accounts require you to take required minimum distributions either upon reaching 72 or ceasing employment. Therefore, many individuals ask if their funds can be moved into a Roth IRA instead.
How to Transfer Your 457 to a Roth IRA
Many retirement accounts, such as 457(b) plans, provide individuals with the flexibility of making either pre-tax or after-tax Roth designated contributions – an appealing feature especially if their anticipated tax rates may increase after they retire.
Unrolling from an existing traditional IRA into a Roth IRA may not always be easy or straightforward; some fees could apply, and if executed incorrectly could become taxable distribution with taxes and penalties applicable.
Roth IRA retirement accounts can be established with after-tax dollars and grow tax free, while traditional IRAs must be included in taxable income in the year of distribution and are subject to minimum withdrawal requirements at age 70 1/2. Speaking to a financial planner will help explain what it would mean for you to transfer funds between these plans.
Taxes
Rollovers may provide great options for many retirees, yet it must be understood the tax implications and considerations before making a decision.
Tax considerations associated with the transfer of your 457 plan into a Roth IRA depend on which account type it’s moved into; for example, funds placed in a traditional IRA will be subject to income taxes at time of distribution.
Roll your money into a Roth account (part of a retirement plan that allows it), and distributions will be entirely tax-free. Furthermore, the funds placed into a Roth IRA won’t count toward your yearly contribution limit, making this option especially suitable for those on the border between tax brackets.
Fees
A 457 plan is a tax-advantaged retirement savings scheme available to government and non-profit employees, that allows you to defer income taxes until withdrawals. Many plans also offer Roth contributions that allow contributions made with after-tax dollars to become tax-free distributions when certain conditions are fulfilled upon retirement.
Governmental 457 assets may qualify for conversion into a Roth IRA, provided they have been held for at least five years and you have reached age 59 1/2 or retired from service – otherwise, taxes will apply on any funds withdrawn.
Alternatively, consider spreading out your rollovers over multiple years to reduce the chance of one large tax bill accumulating at once and also decrease your risk of overpaying taxes by converting during an underincome year.
Investment Options
Your choice between traditional before-tax or Roth 457 accounts depends on the anticipated tax rates in retirement. A Roth plan allows you to pay taxes upfront before withdrawing contributions and earnings tax-free upon meeting certain conditions in retirement.
Additionally, unlike traditional retirement accounts, Roth 457 plans don’t require you to take required minimum distributions (RMDs) at age 70 1/2 – further enabling your savings.
Rollover funds from a governmental or nongovernmental 457(b) plan into a Roth IRA or other eligible plans is possible, though you may incur a 10% early withdrawal penalty before retiring, leaving employment, or reaching age 59 1/2. A financial professional can assist in finding the most appropriate option for your specific circumstances.
Finding a Roth IRA Provider
As with 401(k) and 403(b), 457 plans are tax-deferred employee retirement savings accounts approved by the Internal Revenue Service (IRS). They’re offered to state, local government employees as well as some nonprofit organization employees; employees contribute pretax earnings into an account that grows tax free until withdrawal in retirement.
Although your contributions to a 457 plan aren’t your money per se, unlike in an IRA or 401(k), they still allow you to control how it’s invested within the plan for optimal compound growth and financial security.
As with other retirement accounts, your 457 must begin taking required minimum distributions (RMDs) when you reach age 72; otherwise the IRS will impose a 50% nondeductible excise tax penalty against that portion of your account that has yet to be distributed.
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