Can 457 Plans Be Rolled Over to an IRA?
Rollover IRAs provide many advantages, including increased investment options and potential cost-cutting measures on account management fees. Individuals should carefully weigh the benefits against potential drawbacks before deciding to make this move.
Make note that unlike 401(k) and 403(b) plans, 457 plans do not mandate taking Required Minimum Distributions after age 73 – however Roth IRAs do.
Though a 457 plan can provide excellent investment returns, there are certain tax implications to keep in mind. Governmental 457 plans typically do not enjoy the same tax advantages as 401(k)s and IRAs do and have specific rules around distributions and when/how much must be distributed at once.
Rollovering retirement assets to an IRA offers several financial planning advantages, such as consolidating retirement assets and accessing more investment options while potentially reducing administrative fees. However, this move may require payment of ordinary income taxes upon withdrawal of funds.
Before making this decision, it is wise to consult a tax professional. A traditional IRA might be best in certain instances, such as when you anticipate entering into a higher tax bracket in retirement; but always speak with a financial planner in order to discuss all available options and identify which option best meets your individual circumstances.
Fees associated with 457 plans depend on their size. A larger plan could use its leverage to negotiate lower service provider fees, helping employees save more in their accounts.
Target-date funds offer another method of keeping fees low: they automatically adjust the proportion of stocks to bonds as employees near retirement, helping reduce volatility while assuring that retirees are adequately funded at that point in their careers.
Employees may opt to convert their governmental 457 plans into individual retirement accounts (IRAs), with the IRS offering specifics about each type. Unfortunately, non-governmental plans are ineligible; therefore if you hold both types of plans at once you may only transfer up to their maximum amounts – in 2023 this limit is $22,500 plus your includible compensation or $20,500 (whichever comes first).
457(b) plans often offer limited investment options, whereas IRAs can provide much greater freedom. Furthermore, unlike other tax-sheltered retirement accounts that require annual Required Minimum Distributions (RMD), an IRA does not need to comply with RMD requirements; noncompliance can lead to steep penalties.
Another critical consideration should be a reader’s marginal income tax rate, since an increased tax liability of around $50,000 could make Roth conversion less appealing.
Rolling over money into a traditional IRA does not incur an income tax liability or penalty; however, depositing the funds within 60 days may incur taxes and penalties as they will be considered distributions and may incur taxes and penalties as such. Brighton Jones can help clients integrate complex compensation packages into their larger financial picture; to learn more please set an appointment with us!
Rollover of 457 plans into an IRA can be an efficient way of saving for retirement, but you should keep several key constraints in mind before making this move. Non-governmental plans cannot be converted to Roth IRAs and tax-free withdrawals are only available once reaching age 59 1/2.
If you convert your 457 plan balance to a Roth IRA, any converted amount is subject to regular income taxes on it, however if you are under 59 1/2 when making this conversion you won’t incur an early withdrawal penalty of 10%.
While a Roth IRA can help reduce tax burden in retirement, a traditional IRA may offer other advantages that better match your needs. Before making your decision, consult with a financial professional first.
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