Can I Do Monthly Rollovers From My 457 to an IRA?
A 457 is a governmental or nonprofit deferred-compensation plan. The part of your pay that goes into the account isn't taxed until you withdraw it. A governmental 457 is one of several types of qualified employer plans you can roll into an individual retirement account. You may be able to make monthly rollovers from a 457 to an IRA, as long as you follow the tax rules. For example, you can't roll money from a nonprofit organization's 457 into an IRA. You normally can't roll a qualified 457 plan into an IRA until you leave your job. However, you can do a Roth IRA conversion after age 70 1/2, even if you're still working.
You can transfer or roll over assets tax-free from your 457 plan to a traditional IRA as often as you want after you leave your job. However, your plan may require you to move your balance to your new employer's 457 if you change jobs. If you do a trustee-to-trustee transfer, the assets move directly without being distributed to you. You can also do a rollover by withdrawing the money from your 457 and contributing it to your IRA in 60 days. If you miss the deadline, the IRS will tax the rollover amount at your regular income tax rate. It may also slap on a 10 percent early withdrawal penalty if you're younger than 59 1/2. The plan trustee withholds 20 percent of your distribution for taxes. If you don't replace this amount in your IRA contribution, the IRS will tax it permanently.
You can't make monthly rollovers from your 457 plan to an IRA if they are a series of substantially equal periodic payments. The IRS provides this method of distributing plan proceeds to allow you to withdraw money before age 59 1/2 without triggering the 10 percent penalty. This kind of withdrawal must occur at least once a year, over your lifetime or a period of 10 years or more. You also can't roll over required minimum distributions, hardship withdrawals, excess distributions, loans, dividends on employer securities or insurance policies.
If you make monthly rollovers from your 457 account to an IRA, you might consider setting up a conduit IRA to receive the money. This is a traditional IRA you set up as a temporary home for withdrawals from qualified employer plans until you move the funds to a different employer plan. For example, if you plan to change jobs in the next year, you could make monthly distributions to your conduit IRA from your 457 and later roll the conduit to, say, a 401(k) plan. You normally don't contribute to a conduit IRA because some employer plans only allow the transfer of money stemming from another qualified employer plan.
You can transfer assets directly from your 457 plan to a Roth IRA. However, you must pay income taxes on the part of the transfer that hasn't already been taxed. You can generally withdraw money from a Roth IRA tax-free. However, you might trigger the 10 percent penalty by making an early distribution of earnings, or investment gains. An early withdrawal is one you make within five years of the transfer or before age 59 1/2. A Roth conversion may create enough additional taxable income to boost you into a higher tax bracket. Your 457 plan might be a designated Roth account, in which case the transfer creates no taxable income. You can't transfer a 457 Roth account to a traditional IRA.
Eric Bank is a senior business, finance and real estate writer, freelancing since 2002. He has written thousands of articles about business, finance, insurance, real estate, investing, annuities, taxes, credit repair, accounting and student loans. Eric writes articles, blogs and SEO-friendly website content for dozens of clients worldwide, including get.com, badcredit.org and valuepenguin.com. Eric holds two Master's Degrees -- in Business Administration and in Finance. His website is ericbank.com.