Can I Rollover My 457 While Still Employed?

Many individuals contributing to deferred compensation plans often wonder about accessing their funds while still employed. Section 457 plans are a type of retirement savings vehicle, frequently utilized by employees of governmental entities and certain tax-exempt organizations. This article explores the specific circumstances and processes that might allow for a rollover of funds from a 457 plan even before separation from service. Understanding the distinctions between plan types and their respective rules is important for determining eligibility for such transactions.

Understanding 457 Plan Types and Distribution Rules

Section 457 plans are categorized into two main types: governmental 457(b) plans and non-governmental 457(b) plans. Governmental 457(b) plans are sponsored by state and local governments, providing a deferred compensation option for their employees. Funds contributed to these plans are typically held in a trust, which protects them from the employer’s creditors. These plans can permit in-service distributions, making rollovers while still employed a possibility.

Non-governmental 457(b) plans, often called “top-hat plans,” are offered by tax-exempt organizations to a select group of management or highly compensated employees. Unlike their governmental counterparts, the funds in these plans are generally not held in a trust for the employee’s sole benefit and remain the employer’s property, potentially subject to creditors. This structure significantly restricts in-service distributions, which are typically only allowed upon unforeseeable emergencies or separation from service.

Another type, 457(f) plans, are non-qualified deferred compensation arrangements for executives within tax-exempt organizations. These plans operate under different rules and generally do not allow for rollovers to other retirement accounts. In-service rollovers primarily focus on governmental 457(b) plans due to their more flexible distribution provisions.

Conditions for In-Service Rollovers

For governmental 457(b) plans, specific conditions must be met for an in-service rollover. A common condition for distributions while still employed is reaching a certain age. Historically, this age was 70 and a half, but was lowered to 59 and a half for governmental 457(b) plans. However, a plan is not obligated to adopt this age, and the specific plan document must explicitly allow for such distributions.

Some governmental 457(b) plans may also permit in-service distributions in the event of an unforeseeable emergency. This is defined as a severe financial hardship from an illness or accident of the participant, their spouse, or dependent, or from property loss due to casualty. This distribution is limited to the amount necessary to satisfy the emergency need and cannot be relieved through other means, such as insurance or asset liquidation without causing further hardship.

In contrast, non-governmental 457(b) plans generally do not permit in-service rollovers under normal circumstances. Their restrictive nature means that distributions are typically only triggered by events like separation from service or a qualifying unforeseeable emergency. Therefore, the possibility of an in-service rollover largely depends on participation in a governmental 457(b) plan that has adopted the necessary provisions.

Where 457 Funds Can Be Rolled Over

Once eligibility for an in-service distribution from a governmental 457(b) plan is established, funds can be rolled over into several types of eligible retirement accounts. Common destinations include a Traditional Individual Retirement Account (IRA) or a Roth IRA. Funds can also be rolled into other qualified employer plans, such as a 401(k), a 403(b), or another governmental 457(b) plan, provided the receiving plan accepts such rollovers.

Rolling funds into a Roth IRA is an option, but it involves specific tax implications. While funds grow tax-free and withdrawals in retirement can be tax-free, the pre-tax amount rolled over from the 457(b) plan becomes taxable income in the year of conversion. This is an important consideration for tax planning as it could increase one’s taxable income for the year.

The receiving plan must accept the rollover. Transferred funds generally maintain their tax-deferred status, unless converted to a Roth account. Non-governmental 457(b) plans have much more limited rollover options, often only permitting transfers to another non-governmental 457 plan.

Navigating the Rollover Process

Initiating an in-service rollover from a 457 plan involves a clear procedural path. First, contact the 457 plan administrator to confirm eligibility for an in-service distribution and request the necessary forms. The plan administrator can provide details on specific requirements and available options.

Participants typically have two main rollover methods: a direct rollover or an indirect rollover. A direct rollover, also known as a trustee-to-trustee transfer, involves funds being transferred directly from the 457 plan administrator to the new retirement account provider. This method is generally recommended as it avoids immediate tax withholding and potential complications.

An indirect rollover means funds are first paid directly to the participant, who then has 60 days to deposit them into another eligible retirement account. If funds are not redeposited within this 60-day window, they may be treated as a taxable distribution and could be subject to penalties. Indirect rollovers typically involve a mandatory 20% federal tax withholding, which the participant must make up to roll over the full amount. After completing the paperwork and submitting the request, follow up with both the 457 plan administrator and the receiving account provider to ensure the transfer is processed correctly and in a timely manner.

Tax Implications of a Rollover

The tax consequences of a 457 plan rollover depend on the type of rollover and the destination account. A direct rollover of funds from a governmental 457(b) plan to a Traditional IRA or another qualified employer plan is generally a non-taxable event. The tax-deferred status of the funds is maintained, meaning taxes are paid only upon withdrawal in retirement.

If an indirect rollover is chosen and funds are not redeposited within the 60-day timeframe, the distribution becomes taxable income. A 20% federal tax withholding is typically applied to indirect rollovers, which the participant must account for to complete the full rollover amount. Rolling funds into a Roth IRA, whether directly or indirectly, constitutes a taxable conversion, where the pre-tax portion is included in the participant’s gross income for the year of conversion.

Distributions from governmental 457(b) plans are generally not subject to the 10% early withdrawal penalty under Internal Revenue Code Section 72, even if the participant is under age 59 and a half. However, if these funds are rolled over into an IRA or another qualified plan, subsequent distributions from that new account before age 59 and a half could be subject to the 10% penalty, unless an exception applies. This distinction is important for individuals considering future access to their rolled-over funds.