The 457b can be an invaluable asset to physicians, educators, and non-profit workers who wish to increase their retirement savings tax-deferred. However, there are specific rules pertaining to its usage once an employee leaves an organization.
Government 457b plans have more flexibility than non-government ones, so understanding this difference could save you from future complications.
You Can Withdraw
As with 401(k)s, 457(b)s allow workers to save pre-tax income and grow it tax deferred. But there are key differences between these types of retirement accounts.
Non-governmental 457(b)s do not fall under the Employee Retirement Income Security Act (ERISA), which can have serious ramifications when transitioning between jobs – specifically when consolidating accounts and rolling over.
Non-governmental plans often require participants to withdraw funds from their account upon separation from service in a lump sum within a specific time period, which can result in a substantial tax bill for some individuals.
These plans may offer participants a “rollover” option to move assets to another private 457(b) or IRA account, providing more investment choices and simplifying management by consolidating all retirement accounts into one location. But this process can be complex; therefore, seeking professional guidance before proceeding may be beneficial.
You Can’t Withdraw
Like 401(k) plans, 457(b) accounts are defined contribution retirement accounts designed for state and local government employees, some nonprofit organizations and public safety workers. Although available only to these particular workers in certain circumstances, 457(b)s often offer less investment choices compared to their private-sector counterparts.
Once you leave an employer, any funds in a 457(b) account must be withdrawn and transferred to another tax-deferred retirement account; such as an IRA, Roth IRA, or new 457(b). A direct rollover would result in an immediate tax bill on any funds rolled over directly.
Withdrawals from a 457(b) plan may differ depending on its classification as either governmental or non-government account and whether your employer matches contributions to it. Withdrawing from a governmental plan generally can be done penalty-free at any time while non-government plans have more stringent rules regarding early withdrawals and rollovers when changing jobs.
You Can’t Roll Over
A 457(b) retirement account provides employees of state and local governments, educational institutions, and nonprofits the chance to save for retirement tax-advantageously. Unlike 403(b)s or 401(k)s however, 457(b) balances do not sit in trust and cannot be transferred into other plans.
As with other retirement accounts, 457(b) accounts offer multiple withdrawal options to account holders. Retirees can withdraw funds in either lump sums or periodic installments; however, any pretax contributions and earnings will incur income tax liability.
Another option for rolling over 457(b) accounts to a new employer’s plan or an IRA may be difficult due to more restrictive non-governmental 457(b) account rules; some employers require employees take required minimum distributions (RMDs) at age 73 if failing to do so incurs penalties; this requirement does not apply for government 457(b) accounts, however.
You Can’t Transfer
When changing jobs, 457b funds may either be transferred into the new employer’s plan or left as-is. Non-governmental 457b plans usually have more complex withdrawal and rollover rules upon separation of service; some may force participants to withdraw funds quickly in a short window which could incur significant taxes bills.
These plans may also restrict investment options and may not permit Roth IRAs, unlike traditional retirement accounts like 401(k)s and 403(b). Finally, unlike their 401(k) counterparts they are not protected against an employee’s creditors like other accounts are.
Because of these restrictions, it may be best to leave money where it is. But this can be challenging because 457b investment returns tend to be relatively strong. Dr. Garfield should consult with both his financial planner and CPA in determining his best course of action; ultimately he may need to increase contributions elsewhere to make up for his tax-deferred savings opportunity that was lost.
