What Happens to a 457b After Leaving Job?
A 457b retirement savings account is a tax-advantaged retirement savings plan offered by certain state and local governments, charitable organizations and non-governmental employers. Employees contribute pre-tax dollars that reduce their taxable income; then the money accumulates tax deferred until withdrawal is made from their account.
Withdrawals may be made without penalty before age 59 1/2; however, income taxes may apply on them. Investment options tend to vary between plans.
Taxes
Your money invested in your 457b plan is not taxed when contributed, but when taken as distributions it will be subject to income taxes and possibly an early withdrawal penalty of 10% if withdrawing it before age 59.5.
Upon leaving your job, any leftover funds can be moved into another retirement account such as an IRA or 403(b). Before doing this, however, consider your employer’s financial stability; an unstable hospital might not be an ideal location to invest your savings.
Governmental and non-governmental 457b plans each come with their own set of rules and regulations, but each may offer catch-up contributions for workers who haven’t reached the maximum employee deferral limit within three years; both kinds offer three-year catch-up contributions if desired, while only government 457bs allow users to move assets directly into an IRA without incurring a 10% penalty fee.
Required Minimum Distributions
Workers typically contribute a percentage of their pay into a 457 plan and invest it in mutual funds and annuities, where earnings and interest accumulate tax-free until retirement. This plan is typically offered to civil servants, police and fire departments as well as nonprofit organizations like hospitals and churches; it differs from 401(k) in that its assets belong directly to an employer and thus could potentially become subject to creditors in bankruptcy proceedings.
One key distinction between 457s and 401(k)s lies in their non-governmental plans allowing early withdrawals without incurring the usual 10% penalty, but only after separation from service. While this may provide greater financial flexibility for workers in emergency situations, this practice may eat into your retirement savings account’s balance over time. Likewise, many non-governmental 457s do not permit rollovers into private retirement accounts which may act as an impediment to more efficient savings strategies.
Rollovers
Contrary to 401(k) or 403(b) accounts, 457(b) funds don’t reside within a trust, leaving them more exposed to your employer’s creditors should it go out of business and making withdrawal options less flexible.
Withdrawals are only allowed under exceptional financial hardship circumstances and need the approval of your employer. Emergencies that qualify include buying a home, paying college tuition fees and medical bills.
Once you leave a job, when rolling over money from a 457(b) account into other types of retirement accounts you must pay taxes on any amounts you rollover; any such money won’t count toward meeting a plan’s annual contribution limit either. One exception would be rolling assets into an IRA or similar tax-deferred account approved by IRS – otherwise any rollover will be considered income and subject to an additional 10% penalty tax.
Withdrawals
457b plans provide deferred compensation that is tax-exempt until they are withdrawn, typically by state and local governments, police departments and fire departments, hospitals, charities, nonprofit organizations and unions.
IRS rules permit early withdrawal without incurring the usual 10% early withdrawal surtax if they leave service with their plan sponsor before age 55 or 59 1/2, though unlike with 401(k) and 403(b) plans you cannot move them to another tax-deferred account.
IRS allows 457b owners to withdraw early from their accounts for unplanned emergencies like divorce, loss of employment, medical procedures not scheduled in advance and funeral costs. Other reasons could include purchasing a home or paying college tuition fees for children. Unexpected emergencies must meet IRS’ definition of hardship which includes imminent foreclosure/eviction as well as significant unavoidable debts.
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