What Happens to a 457b After Leaving Job?
Like 401(k)s and 403(b), 457(b) plans are tax-deferred plans; you won’t owe taxes until you withdraw it from the plan. Some governmental plans can even offer Roth options that use after-tax dollars as contributions.
457(b) accounts may offer more limited investment choices, including annuities and mutual funds than 401(k) plans due to employer matching restrictions and lack of employer contributions.
Taxes
Many are familiar with retirement savings tools such as the 401(k) and 403(b), yet some might not know about the 457(b). A 457(b) is a tax-deferred retirement plan available exclusively to government employees that allows them to save for their future without incurring income taxes when withdrawing assets at any time from trust, without incurring additional income tax liability. Furthermore, once you leave an employer you can transfer any accumulated funds to any retirement account recognized by the IRS.
However, it’s important to remember that 457(b) plans can only be transferred into another non-governmental plan and savings held within it aren’t protected from creditors like they are with 401(k) plans – making the decision about keeping or rolling over difficult. Furthermore, investment options tend to be less flexible in 457(b) accounts compared to 401(k). Finally, any excess deferrals not distributed as soon as administratively feasible could become subject to income tax under Reg 1.457-11.
Required minimum distributions
If you are leaving employment, one option for rolling over your Commonwealth 457 account into another retirement plan could be rolling it directly or indirectly into another plan. Direct transfer means receiving your account in the form of a check with taxes withheld; indirect transfers allow it to be sent into traditional or Roth IRAs, 403(b) plans, SEP IRAs etc – check with IRS chart for eligible accounts.
Non-governmental plans provide more freedom when selecting investments and withdrawing at various times; however, their potential risk increases significantly due to not being supported by government guarantees.
Your 457 plan offers several distinct advantages over other retirement accounts, such as 401(k). First and foremost is its freedom from early withdrawal fees – you can withdraw funds at any age before age 59 1/2 without incurring an early withdrawal penalty of 10%. Furthermore, distributions from it may help boost your income and push into higher tax brackets.
Rolling over to an IRA
Once you leave your job, if your 457(b) plan funds become eligible to be withdrawn or transferred into a different retirement account or an Individual Retirement Account (IRA), income taxes must be withheld from any withdrawals and periodic distributions may also be taken in some instances. To rollover directly into traditional private sector 401(k) or IRA plans you’d need to request this directly with your former employer’s plan provider.
Non-governmental 457(b) plans provide some protection from an employer’s creditors, yet are less flexible than 401(k). They require either separation from service or hardship withdrawal before you can access funds, creating an inconvenient tax situation that often causes medical doctors to discontinue contributing after some years – but having one bird in hand is always better than two in the bush!
Rolling over to a 403(b)
If you want to continue saving tax-deferred, one way is to roll over your governmental 457(b) into an eligible retirement account or transfer them directly into another employer’s plan. Non-governmental plans do not offer as many options since their funds do not reside within trust accounts and must only be moved between similar plans.
Leave Your 403(b) Alone For Retirement You could leave your 403(b) alone until retirement arrives, but be mindful that doing so comes with certain drawbacks – income taxes and penalties will apply if withdrawing the money before age 59 1/2 is reached. Consult a financial professional in order to develop an appropriate withdrawal strategy that takes into account changing life circumstances and market conditions; remember also that fees associated with each type of savings account could diminish its return over time.
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