Can You Roll Over a 457 Plan? What Are Your Options?

A 457 plan is a non-qualified deferred compensation arrangement for employees of state and local governments and certain tax-exempt organizations. These plans allow participants to defer a portion of their income on a pre-tax basis, with earnings accumulating tax-deferred until distribution. While rollovers are generally allowed, the specific rules governing these transfers can differ significantly depending on the type of 457 plan involved. Understanding these distinctions is important for managing retirement savings effectively.

Understanding 457 Plan Types and Rollover Eligibility

Two primary types of 457 plans exist: governmental 457(b) plans and non-governmental 457(b) plans. The classification of a 457 plan fundamentally dictates its rollover eligibility and options.

Governmental 457(b) plans are established by state and local government entities for their employees. These plans permit rollovers to a broad range of other qualified retirement accounts. Eligibility for a rollover from a governmental 457(b) plan is typically triggered by several events. A common trigger is separation from service with the employer, which allows the participant to move their funds.

Participants may also be eligible for an in-service distribution if they reach age 70½, even if still employed, which can then be rolled over. Other events such as death or disability of the participant also permit distributions that can be rolled over by beneficiaries or the disabled individual.

Non-governmental 457(b) plans, conversely, are established by tax-exempt organizations for a select group of management or highly compensated employees. These plans are non-qualified, meaning they are not subject to the same protections and rules as qualified plans under the Employee Retirement Income Security Act (ERISA). Funds in these plans are generally subject to the claims of the employer’s general creditors until distributed.

This non-qualified status significantly limits rollover options for non-governmental 457(b) plans. Rollovers from these plans are generally restricted to another non-governmental 457(b) plan. They typically do not permit direct transfers to individual retirement arrangements (IRAs) or other qualified retirement plans like 401(k)s or 403(b)s.

Choosing a Rollover Destination

The choice of a rollover destination account depends directly on the type of 457 plan from which funds are being moved. The Internal Revenue Service (IRS) provides specific guidance on permissible transfers, which vary between governmental and non-governmental plans. Understanding these distinctions helps in selecting an appropriate recipient for your deferred compensation.

For governmental 457(b) plans, participants generally have several options for rolling over their funds. These funds can be rolled over to a traditional IRA, allowing continued tax-deferred growth. A rollover to a Roth IRA is also an option, though this typically involves converting the pre-tax funds to Roth, which makes the converted amount taxable income in the year of conversion.

Governmental 457(b) plan assets can also be rolled into other qualified employer-sponsored retirement plans, such as a 401(k) plan, a 403(b) plan, or even another governmental 457(b) plan. This flexibility allows individuals to consolidate their retirement savings or move funds to an account that better suits their investment preferences or fee structures.

Non-governmental 457(b) plans, however, face much stricter limitations regarding rollover destinations. As non-qualified plans, their funds are generally not eligible for direct rollovers to traditional or Roth IRAs. They also typically cannot be rolled into qualified plans such as 401(k)s or 403(b)s.

The primary rollover option for a non-governmental 457(b) plan is a transfer to another non-governmental 457(b) plan. This restriction emphasizes the unique nature and limitations of non-governmental deferred compensation arrangements.

Executing Your Rollover and Tax Considerations

Executing a rollover involves specific steps and has direct tax implications that depend on the method chosen. Before initiating any transfer, it is important to contact the current 457 plan administrator. They can provide specific forms, outline their internal procedures, and clarify any requirements unique to their plan.

The preferred method for most rollovers is a direct rollover, also known as a trustee-to-trustee transfer. In this method, the funds are moved directly from your current 457 plan administrator to the receiving institution without passing through your hands. To initiate a direct rollover, you typically complete a rollover request form provided by your current plan, designating the new account as the recipient. A significant benefit of a direct rollover is that it is not subject to the mandatory 20% federal income tax withholding that applies to direct distributions. These transfers are generally tax-free, meaning no immediate tax liability arises from the movement of funds.

An indirect rollover, or 60-day rollover, involves the distribution of funds directly to you. If you choose this method, your 457 plan administrator is generally required to withhold 20% of the distribution for federal income taxes, as per IRS regulations. You then have 60 days from the date you receive the funds to deposit the full amount into an eligible retirement account.

To complete an indirect rollover, you must deposit the entire amount of the distribution, including the 20% that was withheld, into the new account. If the rollover is not completed within the 60-day window, the entire distribution becomes fully taxable as ordinary income and may be subject to an additional 10% early withdrawal penalty if you are under age 59½, unless an exception applies.

For tax reporting purposes, you will receive a Form 1099-R, “Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.,” from your distributing 457 plan administrator. This form reports the amount of the distribution and any taxes withheld. If you complete a rollover, the receiving institution will typically issue a Form 5498, “IRA Contribution Information,” confirming the deposit into an IRA.