What Happens to a 457b After Leaving Job?
A 457(b) retirement savings plan is available to government employees and certain nonprofit organizations, and usually allows participants to withdraw funds after leaving their employer – though plans may have different rules regarding withdrawal.
Governmental 457(b) plans typically offer more investment options than their 401(k) counterparts and don’t impose early withdrawal fees like non-governmental 457(b) accounts do, yet may charge early withdrawal fees upon early withdrawals. But these plans often have fewer withdrawal options and higher fees associated with early withdrawals.
Withdrawals
457(b) plans are non-qualified retirement savings accounts offered by government and some non-profit employers that allow employees to save pretax, with earnings that grow tax deferred until withdrawal. They also allow catch-up contributions for those 50 and over; unlike other retirement/investment accounts they do not require ERISA reporting or carry a 10% early withdrawal penalty penalty when withdrawing funds early.
Plan rules and fees vary widely, offering limited or no investment choices for an account holder to consider when leaving an employment position: rollover to a new employer’s retirement plan or an IRA account or withdraw it altogether.
Employees participating in governmental plans may withdraw funds at any time without incurring the 10% early withdrawal penalty, although they must begin taking required minimum distributions (RMDs) when they reach age 73. For employees in non-governmental plans with more limited withdrawal options that may be subject to their employer’s creditors and could benefit more from traditional 401(k)s or 403(b).
Transfers
A 457(b) deferred compensation plan is a tax-advantaged retirement savings account offered by state and local governments as well as certain tax-exempt organizations for employee use. Employees contribute pre-tax dollars into these accounts which reduce take-home pay while growing tax-deferred until withdrawals occur, at which time distributions must be reported as regular income.
Employees have the choice to either move their funds from one employer’s plan to another or into an individual retirement account; alternatively they may withdraw it in times of severe financial emergencies like medical care expenses, foreclosure or eviction proceedings, funeral costs or property loss due to casualty.
Some providers provide on-site education representatives to assist workers in understanding how the plans operate, which can add fees that may be higher for smaller plans than for larger ones. IRAs tend to charge lower fees than 457(b) plans; whether or not to transfer out from under your current job’s plan can depend on several factors including investment choices available and your financial goals.
Rollovers
A 457(b) plan allows you to transfer funds out into other retirement plans, including traditional or Roth IRAs, 403(b) plans, 401(k), and employer non-457(b) plans without impacting your annual contribution limit. Funds transferred do not count toward that limit.
Once you are over the age of 59 1/2, withdrawing funds from a 457(b) plan without incurring an early withdrawal penalty is allowed – though you will need to pay regular income tax on them as usual.
Many people who have access to a governmental 457(b) plan regard it as the superior savings option over private 403(b) and 401(k) accounts, thanks to no early withdrawal penalties and low fees. Furthermore, it provides you with more investment choices than your employer’s 401(k). Nonetheless, you should always weigh the pros against cons of such accounts before making your final decision: either withdraw funds outright, transfer them elsewhere or rollover them to an IRA depending on your long-term goals and financial situation.
Taxes
A 457(b) account allows funds to grow tax-deferred until withdrawal, with earnings compounding as per employer policy and remaining investments still earning potential earnings. Participants can withdraw funds when exiting service or for unforeseeable emergency circumstances – only this withdrawal amount will be subject to taxes.
Governmental plans allow participants to rollover any unused employee deferral limits into an IRA or qualified retirement plan, while non-governmental plans do not permit in-service withdrawals or the ability to rollover an unused deferral limit.
Though 457(b) plans may be less flexible than their 401(k) and 403(b counterparts, they still provide doctors looking to retire early with useful retirement savings tools. There is no penalty associated with withdrawing funds before age 59 1/2; furthermore, government employers often contribute directly into employee 457(b) accounts, making the plan even more attractive; this model can also increase fees because providers need to generate profits off these additional services provided.
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