Can I Transfer a 457b to an IRA?
457(b) plans offer another convenient way of saving for retirement; however, their investment options may be more limited and savings in these plans aren’t protected from creditors in case of employer bankruptcy.
Transferring funds out of a 457(b) plan can be an intricate process, potentially incurring taxes or penalties upon transfer.
What is a 457b plan?
A 457b plan is a tax-deferred retirement savings account offered by many employers. Like its 401(k) counterpart, contributions made into these plans are made pre-tax while distributions taken out later will be taxed as income when taken.
One key difference between 457b plans and other retirement accounts is that funds can be withdrawn without penalty at any time after leaving an employer, even before reaching age 59 1/2. This feature can come in handy in times of transition between jobs or unexpected financial emergencies.
However, the investment options within a 457b plan may be more limited than those found in a 401(k) or IRA account, making it harder to diversify savings to meet your risk tolerance and financial goals. Furthermore, non-governmental 457b accounts don’t enjoy the same protection from creditors provided by ERISA protections; this could become an issue should you lose your job and need to liquidate assets in an emergency.
What are the benefits of a 457b plan?
One advantage of 457b plans is allowing participants to invest their contributions on a pre-tax basis, lowering an employee’s taxable income and helping individuals maximize the amount they can save in a year for retirement through other tax-deferred vehicles such as 401(k)s or IRAs.
457b plans offer another advantage, in that funds are not subject to early withdrawal penalties commonly levied against other retirement accounts. There may still be restrictions as far as how much can be contributed annually, however.
Also, 457b plans typically charge higher management fees than IRAs on the market. Converting to an IRA can help lower these costs and provide an overall view of retirement assets for more effective planning and monitoring. Although the process itself should be straightforward, distribution may take some time before completion.
What are the disadvantages of a 457b plan?
However, unlike 401(k) plans which offer matching contributions from employers, most 457 plans do not provide this benefit. Furthermore, any withdrawals prior to retirement could incur an early withdrawal penalty similar to that associated with 403(b) plans.
Tax-deferred growth is one of the key advantages of a 457(b) plan, meaning investors only pay tax when withdrawing funds in retirement – at which time they may fall into lower tax brackets.
However, one major drawback of 457(b) plans is their insufficient protection from creditors. Instead, funds held in rabbi trust by their sponsoring employer may be vulnerable to legal claims from general creditors of the entity; this risk becomes especially prevalent for non-governmental plans not subject to Employee Retirement Income Security Act (ERISA). IRAs offer protection from creditors while simultaneously providing individuals an early chance at retirement savings by starting saving at an earlier age than usual.
How do I roll over my 457b to an IRA?
A 457b plan provides tax-advantaged retirement savings accounts to employees of non-profit organizations and government agencies, with certain restrictions from the IRS that allow individuals to roll funds from these plans into another type of retirement account, such as an Individual Retirement Account (IRA). Once left their employer or retired, these funds must be moved into either an IRA or designated account in order to avoid early withdrawal penalties; secondly, total contributions made in any year to both an 457(b) plan and an IRA cannot exceed certain IRS threshold limits set forth by them both.
An IRA typically provides more investment options than a 457(b). Individuals deciding to transfer funds from a 457(b) into an IRA should carefully weigh its advantages and disadvantages before making this move. In addition to wider investment choices, rolling over into an IRA may offer benefits like asset consolidation, reduced account management fees savings, withdrawal flexibility for major life events such as medical expenses or buying their first home.
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