How to Roll Over a 457 Plan to a Traditional IRA

A 457 plan is a tax-advantaged deferred-compensation retirement plan for certain governmental and non-profit employees. A Traditional Individual Retirement Arrangement (IRA) is a personal retirement account that allows for tax-deferred growth. Moving funds from a 457 plan to a Traditional IRA is a common step to consolidate accounts or access different investment options after leaving a job. This process involves rules that vary based on the type of 457 plan.

Rollover Eligibility for 457 Plans

The ability to roll over funds from a 457 plan to a Traditional IRA depends on the type of plan. The Internal Revenue Code distinguishes between governmental 457(b) plans for state and local government employees, and non-governmental 457(b) plans for certain employees of tax-exempt organizations like hospitals or charities.

Funds in a governmental 457(b) plan are eligible for a tax-free rollover into a Traditional IRA. The assets in these plans are held in a trust, which allows the funds to be moved to another qualified account. Conversely, funds from non-governmental 457(b) plans and 457(f) plans are ineligible for an IRA rollover because the assets are technically owned by the employer until they are paid out.

For a rollover from a governmental 457(b) to be permitted, a triggering event must occur. Common events include separation from service, retirement, or the termination of the plan. Some plans may also permit in-service rollovers after the participant reaches a specific age, such as 59½, though this depends on the plan’s rules.

Required Information and Key Decisions

To begin, you will need to gather account details for both your 457 plan and your Traditional IRA. You should have the following information ready:

• Your 457 plan account number
• Contact information for your 457 plan administrator
• Your new or existing Traditional IRA account number
• The receiving IRA institution’s name and mailing address

Contact your 457 plan administrator for their rollover distribution form, and check if your IRA provider requires its own transfer acceptance form. These documents will ask for your personal details, account numbers, and the amount you wish to roll over.

You must also decide whether to perform a direct or an indirect rollover. A direct rollover is when the 457 plan administrator sends the funds directly to your Traditional IRA provider. This method is recommended as it avoids potential tax issues.

An indirect rollover involves the 457 plan administrator sending a check made payable to you, but they are required to withhold 20% for federal income taxes. To avoid taxes and penalties, you must deposit the full pre-withholding amount into the new IRA within 60 days. This requires using personal funds to cover the 20% that was withheld.

Executing the Rollover

For a direct rollover, submit the completed request form to your 457 plan administrator by mail or through their online portal. The administrator will then transfer the funds directly to your Traditional IRA custodian. No funds will pass through your personal bank account.

For an indirect rollover, you will receive a check for your distribution amount, less the 20% tax withholding. You have 60 days from the date you receive the funds to deposit the full, original amount into your Traditional IRA. Any portion not deposited within this timeframe will be treated as a taxable distribution.

After submitting the paperwork, you should receive a confirmation from your 457 plan administrator. The transfer of funds usually takes between seven and 14 business days, but can take up to 30 days. You can verify the rollover is complete by checking your new Traditional IRA balance.

Managing Funds in the Traditional IRA

Once the rollover from your governmental 457(b) plan is complete, the funds are subject to all rules governing Traditional IRAs. This change affects rules for early withdrawals and Required Minimum Distributions (RMDs).

A primary rule change involves early withdrawal penalties. While distributions from a governmental 457(b) plan are not subject to the 10% penalty for withdrawals made before age 59½, these funds become subject to IRA rules after a rollover. This means any distribution from the IRA before you reach age 59½ may incur the 10% early withdrawal penalty, unless an exception applies.

The funds are also now subject to IRA rules for RMDs. The assets are combined with any other funds you have in Traditional, SEP, or SIMPLE IRAs to calculate your RMDs. The age you must begin taking RMDs depends on your birth year. For those born between 1951 and 1959, RMDs begin at age 73, and for those born in 1960 or later, the age is 75. Your annual RMD is calculated based on your total Traditional IRA balance and an IRS life expectancy factor, and these withdrawals are taxable income.