Can I Transfer My 457 to a Roth IRA?
Rollover refers to moving your distributions from tax-deferred accounts such as 457 plans into tax-after accounts like Roth IRAs. This transfer typically incurs tax liability; exceptions may exist such as investing in your first home or paying educational costs.
Investors must consider all associated fees when rolling over their 457 account. Brokerage fees, advisor fees, record-keeping fees and other costs could eat into returns significantly.
Employer Matching Contributions
Employees working for state, local or other governmental agencies often have money deducted from each paycheck and deposited into 457(b) retirement accounts, where it can grow tax-deferred until retirement when distributions from these accounts become taxable as ordinary income.
One key difference between 457(b) plans and 401(k)s is that 457(b) plans don’t typically offer matching contributions from employers – this can make a big difference to an investor’s bottom line.
457(b) plan participants have the option to convert some or all of their distributions to a Roth IRA, though only eligible distributions qualify – hardship distributions do not count towards this goal, nor do non-governmental section 457(b) plans, so the number of distributions eligible could be limited. Lastly, conversion is only permitted when account owner is at least 59 1/2 and either has left their employer or been severed from service.
A 457 is an employer-offered tax-deferred savings plan that enables employees to save tax-free for retirement, by contributing a portion of eligible pay before taxes are withheld, with investment earnings not taxed until withdrawal.
An annual contribution limit for a 457 plan in 2023 and later years is the lesser of $22,500 or 100% of your includible compensation, or $20,500 (2022 and 2021); non-governmental plans may permit catch-up contributions from participants aged 50 years or over.
Many governmental 457 plans offer Roth after-tax contributions that reduce gross taxable income in the year of contribution, making these an attractive option for workers expecting to be in a higher tax bracket at retirement or who prefer penalty-free early withdrawals. Other considerations should include how your decision affects other savings vehicles such as your 401(k), IRA or Roth IRA and whether these can all be coordinated simultaneously – for instance you cannot contribute simultaneously.
Early Withdrawal Penalties
457s differ from 403(b)s by not imposing early withdrawal penalties. Withdrawals made from these plans will still be taxed as retirement income, however.
Many state and local government employees, such as firefighters and police officers, as well as employees at hospitals, charities, unions and non-governmental organizations participate in 457 plans in order to save for retirement in an easy and tax-friendly manner. These plans offer employees tax advantages when contributing and earning through these plans.
457 plans offer participants more than just tax efficiency; they also give them flexibility before retirement. This flexibility can be seen through special funds that allow workers to start saving additional money three years prior to their normal retirement age, giving retirees time to shift towards more conservative, bond-based portfolios as they near retirement age – helping avoid having to withdraw and pay a 10% penalty fee on accounts when withdrawing money early from them.
Like other employer-sponsored retirement savings plans like 401(k)s and 403(b), 457s allow employees to set aside part of their current income on an tax-advantaged basis towards retirement savings. They may select from among various mutual funds within their plan, and often change their investments periodically.
One major distinction between 457 accounts and other retirement accounts is the lack of an early withdrawal penalty; however, this penalty still applies if an account owner is under age 59 1/2 or has left employment before 59 1/2.
Public sector employees typically find their 457 plans an excellent place to save for retirement, yet those wanting greater control may wish to roll over into a traditional IRA – this process is simple and affordable with ICMA-RC’s No-Fee Vantagepoint IRA* providing multiple investment options.
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