A 457 plan is an employer-sponsored, tax-favored deferred compensation plan for those in public service or in nonprofit organizations. An individual retirement account (IRA) is a tax-advantaged personal savings plan designed to help you save money toward retirement.
Can you roll over a 457 to an IRA? Yes! You can roll 457 assets into another type of retirement account, including the following accounts, for example:
- Traditional IRA
- Roth IRA
- 403(b)
- 401(a)
- 401(k)
As a physician, you might work at a state university hospital and they may offer you a 457(b). Similarly, you may also get one if you are employed by a nonprofit organization. We’ll take a closer look at 457 plans and IRAs, what it means to roll over a retirement plan and the pros and cons of rolling over a 457 to another type of plan.
Types of 457 Plans
An employer may offer two types of 457 plans: a 457(b) or a 457(f):
- 457(b): State and local government employees and nonprofits offer 457(b)s. 457(b)s are the most common type of 457 plan.
- The 457(f): Highly compensated executives in tax-exempt organizations can receive 457(f)s as a complement to the 457(b).
If you retire early and want to take your money out of a 457 in advance, it’s not subject to the typical 10% penalty tax when you take out money before age 59 ½, which you’ll find in most 401(k) accounts. You can access your funds before that age if you want.
However, you likely will not enjoy the employer matching contributions that typically come with a 401(k). Many government entities offer a pension and the 457 is a supplemental savings plan that lets you save more. If you do get an employer contribution, it counts toward your annual contribution limit and is subject to FICA tax.
However, you can benefit from catch-up contributions if you are less than three years away from normal retirement age. You can add twice the standard annual contribution limit but not more than the annual contribution limit plus the amount of the standard limit you didn’t use in prior years. You cannot contribute more than the annual contribution limit plus the amount of the standard limit you didn’t use in prior years.
What is an IRA?
An IRA is an excellent choice for retirement contributions. Don’t forget about it as a potential possibility for a rollover option if you happen to leave a job in which you have already contributed to a 457.
An IRA offers a tax-advantaged method to save money for retirement through an account set up at a financial institution. You can save for retirement with tax-free growth or on a tax-deferred basis. Let’s take a look at two types of IRAs, traditional and Roth IRAs.
- Traditional IRAs: The traditional IRA offers a tax break of $6,500 plus an extra $1,000 catch-up contribution. They may be deductible and may also lower your taxable income. Withdrawals are taxed at your tax rate at the time.
- Roth IRAs: Your contributions to a Roth IRA are not tax deductible but you can withdraw your money in retirement tax-free. You can contribute $6,500 and $7,500 for those 50 and older, just like a traditional IRA. Taxes and penalties apply to withdrawing earnings before retirement, with a few exceptions. The income phase-out range for single filers is $138,000 to $153,000. It is $218,000 and $228,000 for married couples filing jointly.
What does it mean to rollover your retirement plan?
What is a rollover, exactly? A rollover refers to the transfer of the contents of one retirement plan to another. In the process, you do not create a taxable event. You must withdraw cash or other assets from one eligible retirement plan to another within 60 days.
Can you roll over a 457 to an IRA while still employed? No, you typically can’t roll funds from your 457 if you still work for the company that offers your 457 plan. Once you leave your job, you can roll over your funds.
Advantages of rolling over your 403(b) or 457 plan
You may want to consider several advantages of rolling over your 403(b) or 457 plan before you make that move. Let’s take a look at some benefits:
- Investment options: 457 plans typically only offer a handful of investment opportunities, whereas an IRA may offer more investment options.
- Flexible: You can take advantage of different types of withdrawal options and distributions with an IRA.
- Consolidates accounts: Putting all your money into the same IRA means that your money stays in the same spot, rather than having it in different investment pockets.
Disadvantages of rolling over your 403(b) or 457 plan into an IRA
What are the disadvantages of rolling over your 403(b) or 457 plan into an IRA? Let’s take a quick look.
- Penalty-free age differences: You can take penalty-free distributions if you leave your job, but with an IRA, you must wait until you turn 59 ½.
- Annuity penalties: If you took the money out of your account and there is an annuity in there, you may have to pay high fees.
It’s worth considering all the pros and cons of investing in a 457 as well as rolling over a 457 before you take action. Consider talking to a financial advisor who knows your situation. If you plan to get a job at a hospital after you have a 457, find someone who can specifically advise you about how to handle your old account and how to transfer your money to a different account.
You can withdraw funds from your 457(b) plan at any age, penalty-free, once you leave your employer or retire, so keep that in mind before you make a final decision about what you want to do.
Check out this rollover chart before you make your final decision about whether or not to rollover your 457.
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