What to Do With a 457 Plan After Leaving a Job

A 457(b) plan is a deferred compensation plan available to employees of state and local governments and some non-governmental, tax-exempt organizations. These plans allow you to set aside a portion of your salary for retirement, with contributions and earnings growing on a tax-deferred basis. When you leave the employer that sponsors your 457(b) plan, you must decide what to do with the accumulated funds.

Identifying Your 457 Plan Type

You must first identify which type of 457(b) plan you have. The two categories are governmental 457(b) plans for state and local government employees, and tax-exempt 457(b) plans for employees of certain non-profit organizations like hospitals or charities. The rules for each type differ, which will affect your options.

You can find this information in your summary plan description or other documents provided by your employer. If you cannot locate these, contact your former employer’s human resources or benefits department to confirm your plan type.

Option 1 Keeping Funds in the Existing Plan

One path is to leave your funds within your former employer’s 457(b) plan. This can be a good choice if you are satisfied with the plan’s investment options and the administrative fees are low. By leaving the money in the plan, you continue to benefit from tax-deferred growth and maintain control over your investments.

However, there are potential downsides. You will have another account to monitor, and communication from a former employer may be limited, making it harder to stay informed about plan changes. You must also begin taking Required Minimum Distributions (RMDs) from the account once you reach the federally mandated age. The age for RMDs is 73, but it is scheduled to increase to 75 beginning in 2033 for those born in 1960 or later.

Option 2 Moving Funds to a New Account

Moving your 457(b) funds to a new retirement account, a process known as a rollover, can help consolidate your savings. This can also provide access to a wider array of investment choices or lower fees. Your ability to perform a rollover, and where you can move the money, depends on whether you have a governmental or a tax-exempt 457(b) plan. Governmental 457(b) plans offer the most flexibility, allowing rollovers to most other types of retirement accounts.

Rollover to a New Employer’s Plan

If your new employer offers a retirement plan like a 401(k), 403(b), or another governmental 457(b), you may be able to roll your old plan’s assets into it. This option simplifies account management by consolidating your funds into a single account. However, not all plans accept rollovers from 457(b) accounts. You must contact your new plan’s administrator to confirm they accept such rollovers and to initiate the process.

Rollover to a Traditional IRA

Moving funds from a governmental 457(b) plan to a Traditional Individual Retirement Arrangement (IRA) grants you more investment freedom than an employer-sponsored plan, allowing you to invest in a wide range of assets. A direct rollover from your 457(b) to a Traditional IRA is not a taxable event; the money remains tax-deferred until you take withdrawals in retirement. This option is not available for non-governmental 457(b) plans, as funds from these plans can only be rolled over into another non-governmental 457(b) plan.

Rollover to a Roth IRA

You can also roll funds from a governmental 457(b) plan into a Roth IRA. This transaction is a Roth conversion and has immediate tax consequences, as you must pay ordinary income tax on the entire amount you roll over. The benefit is that qualified withdrawals from the Roth IRA in retirement are completely tax-free. This strategy can be advantageous if you expect to be in a higher tax bracket in retirement than you are currently.

Option 3 Taking a Cash Distribution

You have the option to take a full or partial cash distribution from your 457(b) plan after you separate from service. While this provides immediate access to your money, it comes with tax consequences. The entire amount you withdraw is considered ordinary income for that year and will be taxed at your marginal tax rate, which can push you into a higher tax bracket.

When you request a cash distribution that is eligible for a rollover, your plan administrator is required to withhold a mandatory 20% for federal income taxes. For example, if you request a $50,000 distribution, you will only receive a check for $40,000. The full $50,000 is still considered taxable income, and you may owe more depending on your tax bracket and state taxes.

A feature of governmental 457(b) plans is that withdrawals made after you leave your employer are not subject to the 10% early withdrawal penalty, regardless of your age. This differs from 401(k) and 403(b) plans. This exemption does not apply to funds that were rolled into the 457(b) from a different type of retirement account. Non-governmental plans may have different rules and could require a lump-sum distribution upon separation.

How to Initiate a Rollover or Distribution

To initiate a rollover or distribution, you must contact the plan administrator for your old 457(b) plan. Their contact information can be found on your account statements or by contacting your previous employer’s benefits department. The plan administrator will provide you with the necessary distribution or rollover paperwork. This form will require you to specify what you want to do with the funds, such as taking a cash distribution or rolling the money over to another account.

It is important to understand the difference between a direct and an indirect rollover. A direct rollover is a trustee-to-trustee transfer where the funds are sent directly from your old plan to your new retirement account. In an indirect rollover, you receive a check made out to you, and you have 60 days to deposit the funds into a new retirement account. A direct rollover is the preferred method as it avoids the mandatory 20% tax withholding and eliminates the risk of missing the 60-day deadline, which would make the entire distribution taxable.