457 Plan Rollovers

In comparison to qualified retirement plans, government or Code Sec. 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 even an IRA. For example, 457 plans have permitted lower contribution limits than traditional retirement plans (at least through 2001). Another major disadvantage of 457 plans is that they generally have not allowed tax-free rollovers of distributions 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 a 457 plan have been eliminated beginning in 2002. 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 restrictions 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 may have been liberalized, the amended rules do not require qualified plans, 403(b) annuities, or another 457 plan to accept rollovers. (A rollover to an IRA, though, is still always an available option.)

Rollover guidelines. Beginning in 2002, the rollovers to and from 457 plans will 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. Prior to 2002, the surviving spouse of a deceased participant in a qualified retirement plan, such as a 401(k), could make a tax-free rollover from the deceased's plan if the rollover was made to an IRA. A surviving spouse was not allowed to make a tax-free rollover to another qualified plan, a 403(b) annuity, or a 457 plan.

In 2002 and thereafter, however, a surviving spouse can make a tax-free rollover to her own 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 her own IRA.

Financial Calculators Use this savings calculator to take advantage of the benefits of tax deferral. A 457 retirement savings plan can be one of your best tools for creating a secure retirement. It provides you with two important 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.