Transferring From 457b to IRA
Just like their corporate counterparts, 457 plans offer participants defined contribution accounts that allow them to save pre-tax dollars in pre-tax accounts. But while they share many similarities with these plans, there are also significant distinctions.
Like other tax-deferred investments vehicles, 457 plans impose specific rules surrounding transfers and rollovers. This article will address these rules so you can smoothly move between plans.
Money contributed to your 457b account is typically not taken directly out of your paycheck; rather, employers take a percentage of what would otherwise be your salary and contribute it directly into a retirement account.
Once you leave your sponsoring employer or retire, withdrawal restrictions from a 457 plan should become penalty-free; however, prior to that happening they might impose withdrawal limits that are usually stricter than traditional retirement accounts like IRAs and 403(b) plans.
Non-governmental plans may also be subject to creditors of your employer, which could potentially result in you losing much of your investment. Because of this, many doctors prefer IRAs over 457b accounts as they offer much more investment flexibility and choice; however, 457b plans provide tax benefits; when withdrawing funds from an IRA there will typically not be any penalties, however there may still be federal and state income taxes due on distributions from an IRA account.
Funds in nongovernmental 457(b) accounts generally cannot be transferred into an IRA due to their requirements of taking distributions quickly upon leaving or retiring and becoming subject to income tax and the 10% early withdrawal penalty.
However, if your employer offers a governmental 457(b), you can transfer the account without penalty at any age – making a governmental plan an invaluable retirement savings tool.
Doctors with access to a 457(b) must carefully consider its potential advantages against its limited investment options, fees and distribution requirements before making their decision. Working closely with an advisor on allocating retirement savings tools effectively will ensure a seamless transition into retirement.
Like an IRA, 457(b) plans have their own set of complex rules that make managing retirement accounts more complex than with an IRA. University of Michigan employees have the option to enroll either in a governmental or non-governmental (457(b) deferred compensation plan – one offered by state or political subdivision employers like public universities while the other is sponsored by tax-exempt 501(c) organizations such as private hospitals – each offering distinct advantages and drawbacks; for instance governmental plans don’t require required minimum distributions until retirement or leaving employment at age 72 but withdrawals are taxed when withdrawing;
Non-governmental 457(b)s often have stringent withdrawal rules after leaving employment, presenting you with an uncomfortable tax situation upon departure. Furthermore, rollovers between current plan and an IRA are only allowed; no previous employer plans may be transferred into. Trustee-to-trustee transfers provide the easiest means of rolling over funds; some plans may only permit physical checks requiring more paperwork and processing time.
Non-governmental 457bs can only be transferred into another private, tax-exempt retirement plan or an individual retirement account (IRA) at your new employer, without incurring the 60-day window and withholding. Withdrawals from an IRA account will be treated as income when withdrawing them in retirement.
To prevent this problem, ask your old custodian to make the check payable directly to the new IRA custodian instead of you – this will enable the funds to go straight into your new tax-advantaged account without an income event that triggers the 10% early withdrawal penalty. Furthermore, trustee-to-trustee transfers are another great way of circumventing 60-day rules; you can do an unlimited number each year using this approach and it also eliminates the need to file Form 5498 with the IRS.