Can I Transfer My 457 to a Roth IRA?
A 457 plan is a tax-advantaged deferred compensation retirement plan available from certain governmental and nongovernmental employers, in which participants contribute pretax dollars which then accumulate tax deferred until withdrawal for retirement.
However, unlike with other retirement accounts, you may be eligible to convert part or all of your 457 distributions to a Roth IRA – this article can help you assess whether doing so would be the right move in your situation.
Working for a state or local government agency or tax-exempt organization gives you the ability to save for retirement in an employer-provided 457 plan. While pre-tax contributions to such plans may be more expensive due to income taxes, investing these dollars gives you the chance to reap the rewards of compounding over time.
Transferring eligible 457 funds to a Roth IRA is possible either directly, or via rollover from another eligible plan. Direct transfers involve telling your financial institution where to move the money; while rollover involves receiving distributions from your 457 plan and then depositing them within 60 days into your Roth IRA.
Roth IRAs are individual retirement accounts open to anyone wishing to open one, not intended as replacement for qualified plans such as 401(k), 403(b), or 457(b). Your financial professional can help you balance both taxable and tax-free savings options for retirement.
A 457 plan can be an excellent way for state and local government employees to save for retirement, providing an income source in retirement. However, it is essential that they understand how its tax treatment differs from that of an IRA plan.
If you leave your job or meet certain criteria (for instance, an unexpected emergency), typically funds in a 457 account can be transferred into a Roth IRA; however, any funds transferred out will likely be subject to ordinary income taxes due to being pretax dollars held within it, while Roth IRAs only accept after-tax contributions.
While you have the option to convert your 457 into a Roth, this may not always be wise. Unless your future tax bracket will be lower than your current one, it may be more prudent to let it continue growing tax-advantageously in its original account.
Though Roth 457s do not currently exist, employers that provide pretax 457 accounts and allow in-plan Roth rollovers could provide you with an opportunity to save tax-free dollars before retirement. This may prove particularly advantageous if your taxes will increase significantly once retired.
Contrary to traditional retirement accounts like an Individual Retirement Account (IRA), which you can open on your own, 457s require employer sponsorship and may only be made available to workers in certain industries. Because of this restriction, they may provide less flexibility when withdrawing funds after leaving employment.
Your assets in a 457 plan may be transferred to any eligible retirement account – except tax-deferred plans – however when doing so you’ll experience an income bump as part of the distribution will be taxed, and won’t count towards your yearly limit of contributions to other plans.
Although your 457(b) account can’t directly convert to a Roth IRA, funds can still be moved into a Roth annuity which will provide tax-free retirement income throughout your life. It may be especially useful if your tax bracket rises after retirement compared to what it is now; since converting from traditional retirement accounts into Roth IRAs requires income taxes on conversion fees you need extra income in order to cover.
Consider both plans carefully when considering your retirement options, including their benefits and how each could fit into your overall plan. Consult a financial professional in order to decide which is the right option for you – remembering that required minimum distributions (RMDs) become effective at age 72 for traditional and governmental 457(b) accounts while they don’t apply to Roth IRAs1. 1
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