Can I Transfer My 457 to a Roth IRA?
A 457 plan is an employer-funded retirement savings account similar to a 403(b), although governmental 457 funds do not technically belong to you as they do with private 401(k) plans.
Government plans can also charge fees, such as vendor or brokerage commissions, that reduce investment returns. Therefore, it’s crucial that investors understand how these fees work before withdrawing or transferring their money.
Taxes
Though 457 plans can offer advantages over traditional IRAs, withdrawals still subject to income tax upon withdrawal. Unlike most retirement plans, however, 457 plans allow contributors to withdraw contributions without incurring an early-withdrawal penalty at age 59 1/2.
Like its 401(k) counterpart, 457 plans usually offer you an extensive variety of investment choices. Furthermore, funds contributed pre-tax reduce taxable income during working years while accruing tax-deferred until withdrawal when taxes must be paid on those amounts withdrawn.
Northwestern Mutual financial advisors can assist in crafting an investment strategy to fit your specific retirement vehicle preferences and goals. Furthermore, our advisors are here to help identify any obstacles standing in your way to a fulfilling future and craft an attainable roadmap that supports them both. All investments involve some risk; even with Northwestern Mutual investments there may be potential for loss of principal.
Eligibility
A 457(b) deferred compensation retirement plan is an attractive tax-advantaged plan available to state and local government employees as well as employees of certain tax-exempt organizations. Like 401(k), this type of retirement savings allows pre-tax funds to grow tax-deferred until you take them out – similar to how an IRA or Roth 401k work.
However, investment options in a 457(b) may be restricted to annuities and mutual funds compared to an IRA where stocks and exchange-traded funds (ETFs) may also be held within. Furthermore, withdrawals from 457(b)s typically only qualify under unforeseeable financial hardship or termination from employment circumstances.
Non-governmental 457(b) plans do not come with the protections afforded by ERISA and thus your savings could become vulnerable to creditors in the event of your employer’s bankruptcy. On the other hand, government 457(b) plans allow you to rollover funds directly into an IRA or 401(k), making for easier transition.
Withdrawals
Tax treatment of 457 plans differs significantly from that of traditional retirement accounts, making it essential to understand its effects on savings. Withdrawals from government 457 plans are subject to taxes at the time they’re received regardless of when or how they were made – though these withdrawals can still be rolled over into an IRA and treated as after-tax contributions rather than income.
Rollovers can help streamline retirement planning and open up more investment options. A 457 plan can typically be converted to almost any other retirement account type, including Roth IRAs, traditional IRAs, other 457(b), 403(b), or 401(k). However, the IRS has certain restrictions regarding which accounts can be converted. Distributions from governmental 457(b) plans that exceed $100,000 must not directly roll into Roth IRAs as they would become includible in gross income and subject to the 10% early withdrawal penalty penalty imposed.
Rollovers
If you want to transition assets from your 457(b) into a Roth, a financial advisor can assist with finding the optimal strategy – which could involve an in-plan rollover if your plan administrator allows this.
An in-plan rollover allows you to transfer funds directly from one employer-sponsored retirement account into another account within the same company or IRA without incurring taxes or early withdrawal penalties. For the best experience, direct rollover is preferable as this ensures the distribution from your former account goes directly into your new IRA without needing to report it later to the IRS.
Not all employers provide direct rollover options; in such cases, an indirect rollover may be more suitable. Here, your plan administrator will liquidate your holdings and send you a check plus 20% withholding tax for tax withholding purposes; you then have 60 days to deposit this entire sum into a new IRA before being subject to penalties from the IRS for early withdrawal.
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