Sinkorswim

04/16/02 - IRA Rollovers for 457(b) Plans Just Around the Corner

By: Frank Armstrong, CFP, AIF

Government employees covered under 457(b) plans have previously been at a disadvantage in some key areas compared to private sector plans such as pension, profit sharing or 401(k) plans. Specifically, at retirement or separation, plan proceeds could not be rolled over into an IRA, and pay out options were often not as flexible. Not for long. The Tax Relief Reconciliation Act 2001 enhances their choices. 

What is a 457(b) Plan?

• A 457 plan is a non-qualified deferred compensation plan for states, counties, cities, agencies, and their political subdivisions or agencies.
• Deferred compensation is a contractual agreement between an organization and an employee wherein the organization makes an unsecured promise to defer the compensation of the employee to some future date for services currently performed by the employee.
• The Plan is named after IRS code 457.
• A 457 Plan is a deferred compensation plan whose purpose is to provide a tax favored vehicle for participants to save for retirement.
• It is not a "qualified" retirement under Federal Law.
• The 457 plan is not subject to ERISA, and there are no current funding requirements.
• Through the end of 2001, A 457 plan cannot be rolled over into an IRA, or other qualified pension plan.

A 457 plan had advantages for employees like firemen, police or other employees that were eligible for retirement at far younger ages than private sector employees. Distributions made prior to age 59 ½ are not subject to the 10% early retirement penalty.

Other plan provisions and features may not have been so favorable. Portability was severely restricted, and the investment choices were often unsatisfactory with cost, quality and selection concerns. Deferral and estate planning provisions were not nearly so favorable as IRS. Now these issues have been resolved. Starting in 2002, 457 plans can be rolled over to an IRA, SEP, safe harbor 401(k), 403(b) or another governmental 457 plan.

By rolling their 457 plans to IRAs at retirement or separation, government employees can take direct control of their costs, investment strategy, tax deferral and estate planning opportunities available to their private sector friends. The advantages could be huge.

You will have to evaluate your options carefully, especially if you expect to make plan withdrawals prior to age 59 ½. You may find that you are better off remaining in the 457 plan with its more favorable early retirement provisions. Otherwise, the rollover may present a much more attractive set of features.

As these provisions are brand new, employees should insure that their employers adopt plan amendments allowing for the various rollover opportunities. Many plan documents are decades old and will require revision. And, be aware that depending on specific plan provisions, you may be subject to surrender charges or deferred sales charges if your plan was invested in annuities or "load" mutual funds. See your plan prospectus.

All in all, the changes are a big plus for covered government employees.

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