Can You Roll a 457 Plan Into an IRA?

Individuals often accumulate retirement savings in various deferred compensation plans. A common question is whether funds held within a 457 plan can be transferred into an Individual Retirement Account (IRA). The ability to move assets from a 457 plan to an IRA is not universally applicable and depends significantly on the specific characteristics of the 457 plan. Understanding these distinctions is important for anyone considering such a financial maneuver.

Understanding 457 Plan Types

Deferred compensation plans, known as 457 plans, are retirement savings vehicles for certain public sector and non-governmental tax-exempt organization employees. These plans are governed by Section 457 of the Internal Revenue Code. Important differences based on the employer’s nature determine how funds within the plan can be managed, especially concerning rollovers.

One primary category is the governmental 457(b) plan, offered by state and local government entities, including public schools and universities. Contributions are made through elective deferrals from an employee’s salary, allowing pre-tax contributions to grow tax-deferred until distribution. These plans permit catch-up contributions for employees nearing retirement, enabling additional savings beyond standard annual limits.

Non-governmental 457(b) plans are sponsored by tax-exempt organizations, such as hospitals, charities, and unions. While allowing elective deferrals, these plans are typically unfunded. This means assets remain part of the employer’s general assets and are subject to the claims of the employer’s creditors. Employees do not have a direct ownership interest in the plan assets until distribution.

A less common variant is the 457(f) plan, often called a “top-hat” plan, for a select group of management or highly compensated employees of tax-exempt organizations. Unlike 457(b) plans, 457(f) plans are non-qualified and generally involve a substantial risk of forfeiture. An employee’s right to deferred compensation is contingent upon meeting specific conditions, such as remaining employed for a certain period; otherwise, the employee forfeits the deferred amount.

Determining Rollover Eligibility

The ability to roll over funds from a 457 plan into an IRA depends entirely on the type of 457 plan. Not all 457 plans are treated equally under the tax code for portability, dictating whether a transfer to an IRA is permissible.

Governmental 457(b) plans generally permit rollovers to traditional or Roth IRAs, as well as to other qualified retirement plans like 401(k)s or 403(b)s. Eligibility typically arises upon a “distributable event,” such as separation from service, reaching age 70½, death, or disability. The Internal Revenue Service (IRS) treats these plans similarly to other qualified plans for rollover purposes, allowing tax-free transfer of funds to another eligible retirement account.

Conversely, non-governmental 457(b) plans are typically ineligible for direct rollovers into IRAs or other qualified plans. This restriction stems from their non-qualified status and the fact that assets remain subject to the employer’s creditors. Distributions from these plans are generally taxed as ordinary income when received and cannot be rolled over to defer taxation. Similarly, 457(f) plans are also not eligible for rollover into an IRA or other qualified retirement plan.

Distributions from non-governmental 457(b) and 457(f) plans are generally taxable in the year received and do not qualify for the tax-deferred rollover treatment available to governmental 457(b) plans. An eligible rollover distribution from a governmental 457(b) plan refers to any distribution that is not a required minimum distribution, a hardship distribution, or a series of substantially equal periodic payments.

Executing the Rollover Process

For those holding a governmental 457(b) plan, initiating a rollover into an IRA involves specific procedural steps to maintain the funds’ tax-deferred status. The process can be completed through a direct rollover or an indirect rollover.

A direct rollover is the most common and recommended approach, simplifying the transfer and avoiding immediate tax consequences. Funds are transferred directly from the 457 plan administrator to the IRA custodian. To initiate this, the participant contacts their 457 plan administrator, requests a direct rollover, and provides necessary IRA account details like the account number and custodian’s name. The administrator typically provides forms to complete the transfer, ensuring funds move without the participant taking possession.

The alternative is an indirect rollover, also known as a 60-day rollover, where funds are first distributed to the participant. The 457 plan administrator is required to withhold 20% of the distribution for federal income taxes. The participant then has 60 days from receipt to deposit the entire amount, including the withheld 20%, into an IRA. This may require using personal funds to cover the withheld amount to deposit the full original distribution.

If the full amount is not rolled over within 60 days, the unrolled portion becomes taxable income and may also be subject to an additional 10% early withdrawal penalty if the participant is under age 59½. Participants should provide information such as their Social Security number, current address, and the receiving IRA’s name and account number. After the rollover, participants receive confirmation statements from both the 457 plan administrator and the IRA custodian, and Form 1099-R will be issued by the 457 plan administrator to report the distribution.