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457 Deferred Comp Rollover

The New York State Deferred Compensation Plan, or 457, is benefit plan for employees of the State and other participating employers. 

A 457 plan allows eligible employees of state and local governments and tax-exempt organizations to defer income taxes on retirement savings into future years. Contributions are taken on a pre-tax basis, meaning that taxable income is lowered (ex: if you had a monthly earning of $5,000 in one month and contribute $1,000 to your 457 plan, your taxable income is only $4,000). Typically, the underlying securities in a 457 plan are either mutual funds or annuities. Unlike a 401(k) plan, withdrawals from a 457 plan prior to age 59 1/2 are not subject to a 10% withdrawal penalty fee. 

In order to gain further control over your savings, you can rollover your 457 deferred compensation plan into a traditional or Roth IRA. However, there are pros and cons that must be considered prior to exercising this option. 

Advantages of a 457 rollover into an IRA

  • Wider array of investment options: 457 plans are generally limited to mutual funds and some annuities, while an IRA allows securities such as stocks, bonds, ETFs, CDs, etc. These additional options will allow you to create a custom portfolio more suitable to your goals, investment time horizon, and risk tolerance.
  • Greater withdrawal flexibility: Some 457 plans allow only lumpsum distributions and may limit the frequency of withdrawals. If you roll the money into an IRA, you can take it out on your own schedule after you reach age 59 1/2.
  • Independence: If your 457 plan is attached to all your previous employers’ plan balances, rolling over into an IRA ensures that you’ll have a single, consolidated account to track that is no longer attached to previous occupations.  This makes it easier to monitor your investments, rebalance as appropriate, and schedule required minimum distributions.
  • Estate-planning benefits: With some 457 plans, heirs must take out all the assets after the account holder dies and face a potentially large tax bill. The independence granted in an IRA account may allow you to leave money to your heirs with less government intervention. 

Advantages of keeping a 457 plan

  • No age restrictions on withdrawals: Distributions from a 457 plan at any age are penalty-free provided that you leave your job. With an IRA, you must be age 59 1/2 to take penalty-free distributions. 
  • Foregoing surrender charges: If there are annuities within your 457 that that would incur substantial surrender fees upon rolling over your plan, you may want to consider leaving the money in your current 457 plan.

Rollover Tip: If you decide to roll over your 457 plan, be sure to transfer your balance directly into an IRA. If the distribution is made to you first, the plan must withhold 20% for federal withholding taxes.

Thinking about a 457 plan rollover? Call Craig James Financial Services at 631.393.2888 now to schedule a complimentary consultation, review your financial goals, and see if a rollover is right for you. 

Rollovers are not suitable for everyone. Please consider all options prior to making a decision.