How Does the 457 Rollover Process Work?
Moving funds from a 457 plan involves critical choices based on your plan type and transfer method. Learn the process for a smooth, tax-free rollover.
A 457 plan is a tax-advantaged retirement account for employees of state and local governments and certain non-profit organizations. It allows individuals to save for retirement with funds growing on a tax-deferred basis. When you leave your job, you can move these funds into another retirement account through a rollover. This action allows you to consolidate retirement assets and potentially access different investment options.
457 Plan Types and Eligible Rollover Destinations
The ability to roll over funds from a 457 plan depends on its type. The two primary categories of 457(b) plans, governmental and non-governmental, have different rollover rules. Identifying your plan type is the first step, as it dictates where your money can be transferred.
Governmental 457(b) plans, for employees of state and local governments, offer the most flexibility. You can roll these funds over to several other qualified retirement accounts, including:
- Another governmental 457(b) plan
- A 401(k)
- A 403(b)
- A traditional Individual Retirement Arrangement (IRA)
A feature of governmental 457(b) plans is that withdrawals after separating from service are not subject to the 10% early withdrawal penalty, regardless of age. This benefit is lost if you roll the funds into a different type of account, like an IRA or 401(k). Once moved, the assets are subject to the new plan’s rules, which include the 10% penalty on distributions before age 59 ½.
Non-governmental 457(b) plans, sponsored by tax-exempt organizations like non-profit hospitals or charities, have more restrictive rollover rules. Funds from these plans can only be rolled over into another non-governmental 457(b) plan. They cannot be moved into an IRA, 401(k), or 403(b).
A less common plan type is the 457(f) plan, a non-qualified deferred compensation arrangement for highly compensated employees. These plans are not eligible for rollovers. Funds paid from a 457(f) plan are considered taxable income in the year of distribution.
Information and Decisions Required for a Rollover
Before initiating a rollover, you must gather specific information. You will need your 457 plan account number and the contact information for your current plan administrator. You also need the account details for the new retirement account, including the financial institution’s name, address, and the new account number.
A key decision is whether to execute a direct or an indirect rollover. In a direct rollover, your 457 plan administrator sends the funds directly to the new financial institution. This method is common because the money does not pass through your hands, which simplifies tax reporting and avoids penalties.
An indirect rollover is more complex. The plan administrator sends you a check for your account’s value, and you have a 60-day window to deposit the funds into a new, eligible retirement account. If you miss the 60-day deadline, the entire amount becomes a taxable distribution.
A consequence of an indirect rollover from a governmental 457(b) plan is mandatory 20% federal tax withholding. For example, on a $100,000 rollover, your check will be for $80,000. To complete a full rollover and avoid taxes on the withheld portion, you must deposit the full $100,000, meaning you must supply the $20,000 difference from other funds.
The Step-by-Step Rollover Process
To begin the rollover, contact your 457 plan administrator to request the necessary distribution or rollover paperwork. This document will capture your instructions for the transfer.
You must complete the required forms with your personal information, 457 account number, and the receiving institution’s details. For a direct rollover, you will provide the new financial institution’s information. For an indirect rollover, the form will confirm the check should be made payable to you.
After completing and signing the forms, submit them to your 457 plan administrator according to their instructions. These may include mailing, faxing, or uploading the documents through an online portal.
After submission, the plan administrator will process your request. The transfer timeline can vary from several business days to a few weeks. The funds will either be sent electronically in a direct rollover or a check will be mailed to you for an indirect rollover.
Tax Reporting for Your Rollover
Properly reporting the rollover on your annual tax return ensures it is not treated as taxable income. The year after your rollover, your former 457 plan administrator will send you IRS Form 1099-R. This form reports the total distribution from your old plan.
Review Form 1099-R for accuracy. The gross distribution is in Box 1, and for a direct rollover, the taxable amount in Box 2a should be $0. An important field is Box 7, which contains a distribution code. For a direct rollover, this box should have the code ‘G’.
You must report the rollover on your federal income tax return, Form 1040. Report the total distribution from Box 1 of your 1099-R on the line for pension distributions, and enter $0 as the taxable amount. This informs the IRS that the distribution was a tax-free rollover.