What Happens to a 457b After Leaving Job?
Many hospitals now provide employees the option of having a portion of their paycheck withdrawn and placed into a 457(b). Investments within this account grow tax-deferred.
Governmental and non-governmental 457(b) plans have different rules. An “ineligible” 457(f) plan, intended solely for highly compensated employees of non-governmental entities, has even more stringent eligibility restrictions.
Taxes
Just like in a 401(k), money contributed to 457(b) accounts can grow tax-deferred; sometimes the earnings may even remain tax-free!
However, this retirement savings plan differs significantly from its traditional 401(k) counterpart in several key ways. First of all, employers are not required to offer matching contributions and secondly if you leave early or retire without incurring the 10% withdrawal penalty that usually accompanies traditional plans.
However, nongovernmental 457(b)s come with certain restrictions. Money in nongovernmental accounts cannot be transferred into other retirement savings vehicles (like an IRA or 401(k) ) until an unanticipated financial hardship arises such as divorce proceedings, loss of family member or property damage that cannot be covered by insurance policies.
Withdrawals
457 plans can provide many tax advantages and allow participants to invest a portion of their paycheck tax-deferred. As with 401(k)s and Roth IRAs, 457 accounts provide access to various investment opportunities.
Investment options under governmental retirement plans typically consist of annuities and mutual funds; those in non-governmental plans may offer more choices. Investors should understand their limitations with their employer-sponsored retirement accounts before exploring traditional or Roth IRA options if more investment choices are desired.
Governmental 457 plans allow workers to withdraw funds without incurring penalties upon retirement; however, certain conditions must first be fulfilled, including an unexpected emergency such as purchasing or repairing their home or paying tuition for their child’s college tuition. Non-governmental plans often have more stringent withdrawal restrictions and do not waive the 10% early withdrawal penalty that 401(k) plans do.
Rollovers
457b plans allow participants to transfer funds pre-tax from other retirement accounts such as IRAs and employer-sponsored pension plans into their 457b account, similar to how 401(k)s work. Likewise, Virginia deferred compensation plans accept rollovers from designated Roth accounts which are taxed differently than traditional contributions.
Contrary to 401(k)s, where withdrawals may be taken penalty-free before age 59 1/2 for retirement planning purposes or unexpected emergencies, 457bs typically don’t allow penalty-free withdrawals until age 57 (with exceptions such as moving employers or incurring terminal illness), though in rare instances they may allow using funds for natural disaster-related repairs of homes or repairs as soon as necessary.
Due to potential regulations, many physicians opt to either forgo 457bs entirely or limit their contributions. For best results, speak to a financial advisor well ahead of when you intend on retiring in order to ensure compliance.
Loans
Similar to 401(k)s and 403(b)s, 457(b)s are employer-sponsored retirement savings accounts designed for employees of local governments and certain nonprofit organizations that allow them to save tax-deferred. When employees contribute, they receive an upfront tax break which reduces taxable income while investments grow tax deferred until retirement when distributions can be taken and taxed at ordinary income rates; withdrawal timing could help avoid higher tax brackets.
One significant distinction between 457(b)s and 401(k)s is their withdrawal rules; 457(b) plans allow you to access retirement funds more easily in times of emergency without reaching age 59 1/2 or incurring an early withdrawal penalty of 10%. This benefit makes accessing retirement funds simpler, though other saving vehicles should still be accessible should emergency arise.
457(b) plans tend to provide fewer investment options than their 401(k) counterparts and don’t typically come with matching employer contributions; however, many government 457(b)s now include Roth options that can be combined with traditional and other Roth IRA accounts for greater flexibility.
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