If you are a government employee, you now have the opportunity of rolling your governmental 457 plan assets into an Individual Retirement Account (IRA) when you leave your job. This portability option allows you to preserve the tax-deferred growth of your assets, expand your investment selections, and increase your estate-planning flexibility. IRAs also allow for flexible withdrawals and Roth IRA conversions. Take advantage of this opportunity to evaluate your current 457 plan and find out how this IRA rollover opportunity can benefit you.
If you are currently enrolled in a 457 plan and anticipate a distribution, the IRA-rollover option may be right for you (the portability options outlined in this article are available only to the deferred compensation plans sponsored by states and municipalities under section 457(b) of the Internal Revenue Code).
You are now permitted to transfer your 457 plan assets into an IRA without incurring income taxes or premature distribution penalties. Your IRA assets will continue to grow tax-deferred, and you will likely gain access to more investment options than your 457 plan currently provides. In addition, IRA rollovers allow for full or partial withdrawals of account assets, including regularly scheduled distributions that can be transferred directly into a bank account.
By allowing IRA rollovers, the new portability option enables eligible account holders to convert to a Roth IRA. While 457 plan assets must first be rolled into a traditional IRA, from there you can elect to convert all, or a portion, of the assets to a Roth IRA. A Roth IRA allows for tax-free withdrawals five years after conversion and attainment of age 59. If this is an option, you might be interested in, you should speak with a qualified tax adviser about your potential income tax liability upon conversion.
An important note about 457 plans: They are not subject to the 10 percent early-withdrawal penalty, as are traditional IRAs. If you are considering an early withdrawal of your retirement assets, speak with your tax adviser about withdrawing funds from your 457 plan, rather than rolling them into a traditional IRA.
IRAs allow for a wide range of beneficiary designations, including spouse, children and other family members, a trust or your personal estate. With an IRA, designated beneficiaries have the option of taking a lump-sum distribution of benefits, or rolling their inherited portion of the IRA into an eternal IRA, also known as a continual IRA. An eternal IRA allows the beneficiary to roll inherited plan assets into his or her own IRA, thereby preserving the tax-deferred growth of the account.
As with a traditional IRA, eternal IRAs require minimum annual distributions, which are based on the beneficiary's life expectancy. In effect, this can extend the life of the IRA, as well as defer tax liabilities that beneficiaries would incur with a lump sum distribution.
As with all qualified plans, non-spouse beneficiaries do not have the option of rolling 457 plan assets directly into an IRA. Nor may some qualified plans allow account holders to divide account balances among multiple beneficiaries in the exact proportions they desire.
All of these options should be carefully considered when developing a comprehensive estate plan. You may find that an IRA will allow you the flexibility you need when planning for your retirement future.
For more information, e-mail william.a.creekbaum@smithbarney.com or call 689-8700.
Smith Barney does not provide tax and/or legal advice. Please consult your tax and/or legal advisors for such advice.
William Creekbaum, MBA, CFP, a Washoe Valley resident, is senior investment management consultant of SmithBarney, a financial-services firm serving Northern Nevada.