Contributions made to a 457 plan can be tax-deferred; when withdrawing it will become subject to income taxes.
Non-governmental 457 plans can have two key drawbacks that you should carefully consider: you cannot transfer funds into other savings accounts and withdrawals are subject to income tax. These factors should be taken into account.
What is a 457 plan?
A 457 plan is a type of retirement savings account that allows employees to defer pre-tax income until it’s time for withdrawal at retirement, at which point any earnings become subject to regular income tax rates.
A 457 plan typically invests its funds in mutual funds or annuities; investment options may be more limited compared to other employer-sponsored retirement plans, however.
Although both types of 457 plans are available, those holding assets in governmental plans typically enjoy better protection against bankruptcy or creditors than non-governmental ones (whereas their non-governmental counterparts). Furthermore, these governmental 457 plans typically do not require required minimum distributions until age 70 1/2, unlike many employer-sponsored retirement accounts do.
Can I roll over my 457 plan to an IRA?
Like 403(b), 401(k), and traditional IRA plans, 457 plans require minimum distributions by age 72 in order to avoid paying an enormous tax penalty. If these distributions aren’t taken or rolled over as necessary, an enormous tax will be assessed against you and must be paid.
However, 457 plan distributions may be transferred into pre-tax 401(k), 403(b) plans, Roth IRAs or designated Roth accounts; alternatively they could even be moved over into another employer’s 457 plan.
A 457 plan is a retirement savings account offered by state and local governments, tax-exempt nonprofit organizations, and certain religious institutions. While its rollover considerations resemble those for 401(k)/403(b) plans, only government employees and tax exempt employees have access to these plans; moreover, their investment options and fees tend to be significantly fewer.
Can I roll over my 457 plan to a 401(k) plan?
Although it is possible to roll over a 457 plan into an IRA, first consider what account type will best meet your needs. IRAs tend to be more flexible than 457 plans and offer greater investment choices; furthermore they adhere to ERISA guidelines which protect assets against creditors; by contrast, 457 plans may become subject to employer creditors unless you experience unforeseeable financial hardship and can only be withdrawn upon your employer’s consent.
As with 401(k)s and traditional IRAs, 457 plans also require minimum withdrawals at age 72 or else you risk paying a tax penalty. It’s worth taking a close look at any restrictions or fees attached to your 457 plan before determining if using it in retirement is wise.
Can I roll over my 457 plan to a 403(b) plan?
Once you leave government employment and the sponsor of your 457 plan, however, assets can typically be moved over to an alternative retirement vehicle like a 403(b) plan or traditional IRA.
457 plans vary slightly from those offered by for-profit employers, which could impact how your retirement savings vehicles work together.
When rolling over money, make sure it goes directly into the new account or else the IRS may tax it as a distribution and you could face early withdrawal penalties. For more details on this subject, see IRS’s helpful rollover chart.
Can I roll over my 457 plan to a 457(h) plan?
Some local government plans operate as 457(h) plans instead of traditional 403(b) or 401(k). While these plans allow participants to invest their pre-tax income, they do not qualify for rollovers.
As such, if you take part in one of these plans, it is in your best interests to leave your money there until retirement. Any withdrawals will be taxed as ordinary income when taken, plus an additional 10% penalty if taken prior to age 59 1/2.
Withdrawals from these accounts must be subject to FICA and Medicare taxes, while in cases of alternate payee status under qualified domestic relations orders (QDRO), your account should be divided in accordance with its provisions.