Can an IRA & a 457 Be Commingled?

by Eric Bank Google

    A 457 deferred-compensation plan may be available at your workplace if you are a state or local government employee or work for a nonprofit group. The plan deducts money from your paycheck pretax and deposits it in your plan account. A 457 is separate from an individual retirement plan, and you can't mix the two. However, you can roll money from one type of account to the other, as long as you follow Internal Revenue Service rules.

    A 457 plan allows you to contribute up to $17,500 a year, as of 2013. If you're age 50 or older, you can contribute an additional $5,500. A 457 plan at a nonprofit organization doesn't qualify for this "catch-up" contribution. An additional, special catch-up provision for 457 plans allows you to contribute more money in the three years before your normal retirement age. This special contribution limit is the lesser of $35,000 and the sum of $23,000 and the money you didn't contribute in previous years.
    You can make additional contributions above these limits, but you can't exclude them from income. You can't contribute more than 100 percent of your yearly compensation. Your employer can contribute up to $17,500 to your account, or $23,000 if you are 50 or older.

    Within limits, you can roll a 457 plan into a traditional IRA tax-free. You can't roll amounts that are a required minimum distribution, a hardship distribution or an amount that is part of a series of substantially equal periodic distributions. You can roll over cash and other property, whether or not you've paid tax on it. Any rollover amounts on which you've already paid tax will add to the cost basis of your IRA -- you don't pay taxes on your cost basis when you withdraw it.
    You can have your 457 plan trustee transfer your assets directly to your IRA trustee, or you can withdrawal the plan money and contribute it to your IRA using an indirect rollover. If you do the latter, you must contribute the cash to your IRA within 60 days or face taxes and a 10 percent early withdrawal penalty. Your plan trustee will withhold 20 percent of the distribution, which you can reclaim when you file your tax return.

    You can roll your traditional IRA into your 457 plan. The same rules apply for trustee-to-trustee transfers and rollover distributions as those for rollovers in the opposite direction. However, your IRA custodian won't withhold a portion of your withdrawal unless you request it. You can't transfer the cost basis, if any, of your traditional IRA into a 457 plan. When you transfer assets between an IRA and 457 plan, your custodian will issue you IRS Form 1099-R reporting the amount and cost basis, if any. Verify that the form's distribution code indicates you made a tax-free rollover rather than a taxable distribution.

    A 457 plan can be a Roth account. You don't exclude contributions to a Roth 457 from your income, but your withdrawals are tax-free if made after age 59 1/2. You can roll assets from a Roth 457 plan to a Roth IRA, but can't roll a Roth IRA into any form of 457 plan. You can't roll a Roth 457 plan into a traditional IRA. If you roll a traditional 457 plan to a Roth IRA, you will owe taxes on the tax-deferred contributions and earnings, but not on your cost basis. Roth 457 plans require minimum distributions after age 70 1/2, but Roth IRAs don't.

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    About the Author

    Based in Chicago, Eric Bank has been writing business-related articles since 1985, and science articles since 2010. His articles have appeared in "PC Magazine" and on numerous websites. He holds a B.S. in biology and an M.B.A. from New York University. He also holds an M.S. in finance from DePaul University.

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