Can You Fund a Roth IRA Using 457 Plan Funds?

As it pertains to retirement planning, the options can often seem endless. Two popular savings accounts include 457 plans and Roth IRAs - often people wonder whether transferring their 457 to Roth is viable and this article explores this idea more in-depth.

Understanding a 457 Plan

A 457 plan is a non-qualified, tax-advantaged deferred compensation retirement plan available for government employees and some non-government organizations. Contributions made before taxes are applied grow tax deferred until being withdrawn later from your plan.

Roth IRA

A Roth IRA, on the other hand, is an individual retirement account which permits tax-free withdrawals of qualified withdrawals made during retirement. Contributions made into such accounts use after-tax dollars versus 457 funds as their funding source.

Can you Transfer a 457 plan to a Roth IRA?

In general, yes. Funds from a 457 plan may be transferred directly into a Roth IRA through what's known as "rollover", but as with all financial decisions there may be specifics and implications which must be carefully taken into consideration prior to proceeding with any transfer process.

Rollover Process

  • Eligibility: First, verify whether your 457 plan allows rollovers; typically, governmental 457(b) plans do; however non-government ones might impose more stringent conditions.

  • Distribution Event: Most 457 plans require you to reach a distribution event such as quitting employment or retirement before rolling over funds.

  • Direct or Indirect Rollover: In a direct rollover, funds from your 457 plans are transferred directly into a Roth IRA; while for indirect rollovers you will receive your payments and have 60 days to deposit them into an eligible Roth IRA account.

  • Roth Conversion: As your 457 plan is pre-tax and Roth IRA post-tax, any money transferred between accounts requires taxes to be paid on it - this process is known as Roth conversion.

Key Considerations in Planning an Environment Audit

Tax Implications

One of the primary considerations when moving funds from a 457 plan into a Roth IRA is tax implications. Because Roth IRAs are funded with post-tax dollars, you must pay taxes on pre-tax amounts being transferred over from your 457 plan into it; any such amounts would add to your income for that year and could push you into higher tax brackets.

Timing

Timing your rollover correctly is of utmost importance. If you anticipate dropping into a lower tax bracket soon, waiting might make sense; conversely if higher tax rates loom large down the road it might make more sense to complete it sooner rather than later.

Contribution Limits and Penalties

Roth IRA rollovers do not count towards your annual contribution limit; however, make sure to be aware of any penalties or restrictions related to 457 plans before initiating a rollover.

Switching from a 457 plan to a Roth IRA may provide additional investment choices and diversification benefits, with most Roth IRAs boasting greater investment choices compared to 457 plans.

Conclusion

Transferring funds from a 457 plan into a Roth IRA may be possible, but before making your final decision it's essential that you consider all potential tax repercussions and other important aspects. Consulting a financial advisor could offer invaluable insight and assist with helping to assess if such a move fits with your retirement goals and financial status.