Can 457 Plans Be Rolled Over to an IRA?
A 457 plan is a retirement savings account that enables participants to defer pre-tax income until later, typically for government employees.
While a 457 plan can be an excellent way to save for retirement, there are certain restrictions you should keep in mind when choosing such an account. Withdrawals from such plans are only permitted under specific circumstances such as emergencies.
What is a 457 plan?
A 457 plan is a tax-deferred retirement savings account available to some state and local government employees. Similar to a 401(k), participants can divert a portion of their pay into this plan, thus lowering their taxable income.
A 457 plan stands out from other tax-deferred accounts in that, unlike most others, it allows penalty-free withdrawals after leaving an employer that sponsored the plan. This can be especially advantageous if an employee decides to switch jobs and wish to avoid incurring the 10% early withdrawal penalty that often applies with other accounts like IRAs.
457 plans differ from traditional 401(k) plans in that their funds belong to their sponsoring employer rather than participants, providing protection from creditors and bankruptcy. Unfortunately, this also means they may be more difficult to withdraw before age 59 1/2.
Can I roll over my 457 plan to an IRA?
Many public sector employees can take advantage of a 457 plan, similar to employer-sponsored retirement accounts like 401(k). Employees can elect to divert part of their take-home pay into this retirement account where it will grow tax-deferred until withdrawal time. When withdrawing funds, distribution will be subject to regular income taxes.
Individuals looking to directly rollover from a 457 plan into an IRA, which the IRS defines as any tax-deferred account other than another 457 plan or 403(b), can do so by making regular transfers between both accounts. While the details differ for different IRA types, generally speaking you can transfer funds as often as necessary from your 457 plan into one or the other IRAs.
Although IRAs provide greater flexibility than other tax-deferred plans, 457 plans provide the added protection from creditors of their owner’s estate that physicians may prefer when planning for retirement. For this reason, physicians may wish to keep their money safe until then with one.
Can I roll over my 457 plan to a 401(k) plan?
Answering this question depends on what account type you’re moving the money to. In general, funds rolled over from a 457 plan may be moved into either an IRA or employer retirement account such as 401(k) or 403(b). But before making this move it’s essential that you carefully consider any tax implications and potential deductions available to you.
An additional consideration to keep in mind is that your 457(b) plan belongs to your employer and not you; while this could help in case of bankruptcy, it also leaves you vulnerable against creditors.
Before making any definitive decisions, it’s wise to carefully consider all available options and consult a tax professional about them. A qualified professional can assist in developing an efficient savings strategy tailored to meet the unique circumstances of each situation.
Can I roll over my 457 plan to a 403(b) plan?
A 457 plan’s primary benefit lies in contributions being made pre-tax, thus lowering taxable income and growing tax-deferred until withdrawal. Rollovers from a 457 to other plans such as 401(k), 403(b), or IRA are permissible; just make sure it fits with your employer’s plan first!
Before rolling over your 457 account, it’s essential to carefully consider its underlying investments. For example, if your 457 consists of investments held in taxable brokerage accounts such as Vanguard or Fidelity that could push you into higher tax brackets by doing a rollover, rolling it could cause your taxes to go up as a result of this decision.
457 plans do not offer the same asset protections as 401(k) accounts, leaving your assets open to creditors if your sponsoring employer declares bankruptcy. Because of this risk, many people who access a governmental 457 decide to roll their account balances over into a traditional IRA when leaving their employer’s plan – an indirect rollover where funds are moved via trustee-to-trustee transfer with taxes withheld at transfer time.
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