A 457(b) plan provides government employees with an affordable tax-deferred retirement solution. Participants in these plans may withdraw funds tax-free up to age 59 1/2 without incurring a penalty fee.
Unemployment Benefits Tax Return
A 457(b) plan is an employer-sponsored retirement account that allows participants to invest pre-tax dollars, defer earnings and withdraw at retirement. When transferred into an IRA, those investments can grow tax-free.
When rolling over your 457(b) to an IRA, it’s crucial that you understand its process, rules and implications. Failing to do so correctly could result in taxes being levied as well as penalties being assessed – making the switch less desirable in practice than expected.
Know which assets qualify for rollover. Certain proprietary funds and unique investment structures may not transfer, potentially disrupting an otherwise well-thought out financial plan.
Management fees associated with an IRA could eat into returns over time, yet consolidation strategies offer many ways of lowering those fees and can provide significant advantages for retirees and investors alike. With personalized advice available at every turn, rollover strategies could be your key to reaching retirement goals while creating financial security.
Traditional 457 plans provide tax-deferred growth as well as numerous other advantages, including flexibility when withdrawing funds; you may take either a lump-sum distribution or series of installments upon separation from your employer, or convert your account balance into an annuity that provides income streams throughout life. Any withdrawal before age 59 1/2 will incur a 10% penalty fee.
Although 457(b) plans can be useful, they do have certain drawbacks. For instance, your money in a government 457(b) plan belongs to your employer rather than you and could therefore be exposed to creditors if their company or hospital goes bankrupt. Furthermore, its withdrawal policies don’t offer as much flexibility than an IRA when taking early withdrawals for unexpected expenses; many people consider switching over their money to an IRA which offers increased investment flexibility with potentially lower administrative fees.
Though 457(b) money technically does not belong to employees like its counterparts in 401(k) and 403(b), most plans still allow participants to determine how their contributions are invested – usually from among a selection of mutual funds and annuities; though some plans limit available choices.
Plan participants may find target-date mutual fund options in their 457(b) plans beneficial, which invests in an automatically adjusted mix of other mutual funds that change as time progresses towards retirement. This option may be especially helpful for investors with no time or energy available to manage their own investment portfolios.
As with 401(k) and 403(b) plans, employees who save in traditional 457(b) plans receive a tax deduction for any amount they contribute – this makes it particularly attractive to individuals in the 12% or 22% federal income tax brackets, who’ll see their current taxes reduced by about $120 for every $1,000 put into their 457(b).
Like its 401(k) and 403(b) counterparts, 457(b) accounts do not come with an IRS penalty of 10% if participants withdraw funds prior to age 59 1/2 – an incentive for individuals to keep saving as long as possible for retirement.
Generalistically speaking, participants who have their 457(b) account balance vested can move it into an IRA or new employer’s retirement plan; nongovernmental plans cannot be moved into an IRA or 401(k).
Some employers also provide employees with Roth accounts as an additional 457(b) plan option, in which contributions up front are subject to tax but earnings grow tax free and qualified withdrawals in retirement can be completely tax-free.
Which account makes more sense for you depends on your expected tax bracket in retirement and when you expect to reach peak earning potential. We advise working with a tax professional to discuss all available options and create an individualized strategy tailored specifically to you and your unique circumstances.