457 Plan Rollovers

In comparison to qualified retirement plans, government or Section 457 plans (457 plans) have historically been, at best, a questionable means of allowing employees to help save for their retirement. A 457 plan has a number of disadvantages over a traditional qualified plan or an IRA.

For example, 457 plans used to permit lower contribution limits than traditional retirement plans. Another major disadvantage of 457 plans is that, generally, tax-free rollovers of distributions have not been allowed between a 457 plan and any other plan (including another 457 plan, a qualified plan, an IRA, or a 403(b) tax-sheltered annuity).

The lack of portability of 457 plan assets when changing jobs discouraged eligible employees from saving for retirement. To remedy this situation, the restrictions on rollovers to and from 457 plans have been eliminated. If you are a participant in a 457 plan, don't jump up and down with glee just yet. Consider the following two very important limitations on the lifted restrictions:

• The expanded rollover provisions do not apply to 457 plans maintained by nongovernmental tax-exempt organizations because, unlike government 457 plans, they are not allowed to hold assets in trust for employees.
• Although the 457 rollover provisions have been liberalized, the amended rules do not require qualified plans, 403(b) annuities, or other 457 plans to accept rollovers. (A rollover to an IRA, though, is still always an available option.)

Rollover guidelines. Since 2002, rollovers to and from 457 plans generally follow the restrictions and guidelines for rollovers from IRAs and qualified plans like 401(k)s. For example, a direct trustee-to-trustee rollover can be made to avoid a 20 percent withholding tax being taken out. Also, a rollover must be completed within 60 days. If 457 plan proceeds are rolled over to an IRA, the amount will be subject to the one-year waiting period for successive IRA rollovers.

A 457 plan administrator is required to provide a written explanation of the rollover rules to plan participants who receive a distribution eligible for rollover. As with qualified plans, a 457 plan administrator must also report to the IRS all rollovers to and from the 457 plan.

Planning Tools Direct rollovers, like other distributions, are reported on IRS Form 1099-R, which you can download to aid in your financial planning. That is how the IRS catches taxpayers who receive a distribution from a retirement plan and don't roll it over as required.

Spousal rollovers. A surviving spouse can make a tax-free rollover to his or her own 457 plan as long as the plan accepts rollovers from other plans. If a plan does not accept rollovers from other plans, the surviving spouse can still make a tax-free rollover to his or her own IRA.

Financial Calculators Use this savings calculator to check out the benefits of tax deferral. A 457 retirement savings plan can serve as a tool for building a secure retirement. It provides you with two important financial advantages. First, all contributions and earnings to your 457 are tax deferred. You only pay taxes on contributions and earnings when the money is withdrawn. Second, many employers provide matching contributions to your 457 account, which can range from 0% to 100% of your contributions.

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