Understanding your options when it comes to retirement planning can make a real difference in the direction of your finances. One such option is rolling over funds from a 457(b) plan into an Individual Retirement Account (IRA). Here’s a step-by-step guide on how you can do just that.
Understanding a 457(b) Plan
A 457(b) plan is an employer-provided nonqualified, tax-advantaged deferred compensation retirement plan which offers several tax advantages over conventional plans like 401(k). Withdrawals made before age 59 1/2 may not incur penalties provided they’re taken upon retirement or separation from employment.
Decision: Traditional or Roth IRA
Before rolling over, select an IRA type suitable to your requirements:
Traditional IRA: Contributions made pre-tax are taxed during retirement distributions; thus if you rollover into one there’s no immediate tax liability.
Roth IRA contributions are made post-tax; distributions at retirement are tax free. If you roll over into a Roth IRA from an 457(b), any pretax contributions and earnings from that 457(b) account may owe taxes due.
Start an IRA
To create your IRA account, first locate and select an appropriate brokerage or financial institution before filling out all required forms and selecting which type of IRA account suits your needs best.
Contact your 457(b) Plan Administrator
Inform the administrator of your decision to rollover funds. In general, they’ll issue you a distribution form as the first step of this process. On this form are listed any requirements such as rollover fees owed; distribution forms available can also help.
Choose direct rollover (to prevent tax withholding and any penalties).
Provide details of your IRA account including its account number and financial institution name.
Monitor Your Transfer
In order to avoid complications during a rollover, funds should ideally transfer directly between institutions; if funds arrive directly in your possession instead, make sure it lands into an IRA within 60 days – otherwise there could be taxes or potential penalties involved!
Consider Investment Choices
Once your funds have been placed in an IRA, they provide more flexibility in terms of investment options compared with typical 457(b) plans. Consider your retirement goals, risk tolerance and time horizon when selecting investments to fit within it.
Maintain Records
It is vital that all documentation pertaining to your rollover be saved safely – forms from your 457(b) plan, confirmation statements from an IRA account and correspondence regarding it must all remain.
Assess Tax Implications and Plan Ahead
If your rollover into a Traditional IRA was tax-neutral, no special attention will usually be needed when declaring and paying taxes in relation to that conversion. On the contrary, conversion into a Roth IRA requires reporting all taxable funds as soon as they become due and paying any resulting due taxes in that year of conversion.
Respect IRA Rules
While 457(b) plans allow early withdrawals without incurring penalties, an IRA has different regulations; early withdrawals before age 59 1/2 usually incur a 10% fee with some exceptions.
Conclusion
Converting from 457(b) to an IRA may be the perfect move if you are seeking more investment options or consolidating retirement accounts. As with all important decisions regarding finances and investment accounts, consult a tax professional or financial advisor first before undertaking this transition.
