Can I Transfer My 457 to a Roth IRA?
457 plans are tax-deferred retirement accounts similar to IRAs and 401(k), however unlike these other retirement savings vehicles they don’t belong directly to you – your employer holds onto them until its vesting schedule comes up and fully becomes yours.
Rollovers from 457s to IRAs can be tax-exempt events; therefore, it’s essential that proper planning be undertaken. A financial professional can help you weigh the advantages and disadvantages of each alternative available to you.
Taxes
A 457 plan is a tax-advantaged retirement savings plan offered to employees of state, local government, and non-profit employers. Similar to 401(k) and 403(b) accounts, contributions made into this account are pretax; you won’t owe taxes when withdrawing funds in retirement.
If you switch jobs or retire, transferring your 457 funds into another type of retirement account, like a Roth IRA is an excellent strategy to take advantage of tax-free growth and enjoy its benefits for later.
However, you should be mindful of the tax repercussions when rolling over to a Roth. The process is more involved than it seems; to ensure it goes as smoothly as possible and reduce your tax liabilities as much as possible, seek advice from an experienced financial advisor or consult an online calculator before making the switch. To protect yourself against potential liability that may push you into higher tax brackets when switching from pretax 457s to Roths.
In-service rollovers
If you plan on rolling over your 457(b) into a Roth IRA, it’s advisable to consult both the plan administrator at your current job and the brokerage firm that handles the rollover. Be certain that you choose an IRA with flexible investment options and minimal fees; also keep in mind that after-tax contributions from other retirement plans (such as traditional, SEP or SIMPLE IRA) cannot be combined with after-tax contributions made directly into a 457(b).
If you are still employed, there may be ways for you to roll over funds while remaining “in-service” with the company that sponsors your 457(b). While this option is less prevalent and comes with its own set of rules and considerations, it’s still worth speaking with a financial advisor who can guide this process properly. A rollover can bring tax benefits, investment flexibility and simplified account management if done successfully; it is essential that any potential risks and consequences of doing this before proceeding.
Choosing a plan
A 457 plan is a tax-deferred retirement account offered to employees of state and local governments as well as some non-profits. Similar to a 401(k) or an IRA, these plans allow investors to grow funds tax free until withdrawing them, at which point you will have to pay income taxes on what was received as income.
One of the key advantages of a 457 plan is its wide array of investment choices. While 401(k) and 403(b) plans often provide only limited mutual fund options, 457 plans typically provide access to more diverse investment choices.
457 plans can also provide you with an option to withdraw your savings after leaving work, making them particularly advantageous if you plan on retiring early and require access to funds before age 60. It is important, however, to understand the processes and rules pertaining to 457 rollover before making your decision.
Converting to a Roth
A 457 plan provides workers who don’t have access to a 401(k) with similar retirement savings benefits; however, withdrawals may be subject to tax at both state and federal levels; how much tax you owe depends on your current and future tax brackets.
Roth IRAs provide taxpayers with an up-front tax break in exchange for tax-free withdrawals in retirement. Depending on your income and retirement goals, it could make sense to rollover any governmental 457 plan funds into one.
However, this process can be complex, so it is wise to carefully weigh its merits. Consulting a financial or tax advisor can assist in helping determine whether a conversion would make financial sense in your individual circumstances. Converting to Roth may trigger required minimum distributions (RMDs), meaning early retirees could pay additional taxes. Our calculator can help compare both options cost effectively so you can make an informed decision if switching makes financial sense for you.
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