What Happens to a 457b After Leaving Job?
A 457b retirement account is offered to employees of government and certain non-profit organizations, similar to 401(k) and 403(b). Participants contribute pre-tax dollars that are invested tax-deferred.
Employees can withdraw their savings free from penalty when they reach a specific age (usually at least 59 1/2). Any early distributions could incur an early distribution penalty of 10% as well as income taxes.
Withdrawals
A 457(b) plan is an eligible tax-advantaged retirement savings account provided by government employers, where money invested can be withdrawn tax free after leaving its sponsoring employer; any funds remaining can then be rolled over into either a traditional IRA, 403(b), or SEP IRA to help avoid unnecessary taxes and penalties.
Investment options within a 457(b) plan tend to be more restricted than in a 401(k), making it harder to select assets according to your risk tolerance and financial goals. Furthermore, non-governmental 457(b)s may be subject to the creditors of their sponsoring employer while government plans are protected under ERISA; withdrawals from government plans can be done without penalty upon leaving employment or reaching age 59 1/2; however taxes will still apply on this withdrawal.
Rollovers
Governmental 457(b) plans, available to state and local public-sector employees as well as certain non-profit employers, can be converted into traditional individual retirement accounts (IRAs). This enables participants to keep the money already invested while expanding their investment options; tax advantages would still apply as contributors continue to contribute and accumulate tax-deferred earnings into an IRA.
457(b)s have more stringent rules regarding tax-exempt withdrawals, generally not permitting withdrawals prior to leaving employment or reaching age 59 1/2 without incurring an IRS penalty.
When withdrawing their retirement funds voluntarily from their former employer, their funds will be sent in a check with taxes deducted automatically. They can then choose whether to move them into a 457(b), 403(b), 401(k) or traditional IRA – otherwise an early withdrawal penalty of 10% and taxes will apply.
Loans
IRS rules establish that governmental 457(b) plans have annual contribution limits similar to 401(k) and 403(b) plans and provide for extra $6,500 catch-up contributions for 50-year-olds; however, unlike these accounts they don’t require employers to file Form 5500 and do not impose early withdrawal penalties that other tax-advantaged retirement accounts do.
Contrary to 401(k) and 403(b) plans, government employers seldom match employee deferrals in their 457(b) plan, making administration of smaller plans more costly than expected.
After leaving their employer, participants in 457(b) accounts can withdraw funds without incurring penalties at any age. They also have the option of rolling over funds into another 457(b), IRA or retirement account depending on certain criteria such as investment options and distribution requirements of new employer plans – however income taxes must still be paid on any rolled over money.
Taxes
A 457(b) account works similarly to a 401(k), in that employees can set aside part of their paycheck into it as retirement savings plan, thus lowering taxable income while tax-deferred accumulation occurs until retirement time.
As they approach retirement, individuals must start taking minimum distributions that are taxed but they can opt to transfer that money into an alternative plan or an IRA without incurring penalties.
IRS has an early withdrawal penalty of 10% that applies when funds are withdrawn before age 59 1/2; however, they can avoid it by taking advantage of hardship exemption or rolling over their account into another plan with similar employers (non-governmental).
An advisor can assist in helping you understand the rules and regulations associated with your 457(b) or 401(k), as well as options available when leaving an employer. They’re there to ensure all types of savings vehicles work together harmoniously so you can reach your retirement goals more easily.
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