When Should You Rollover 457(b) Into a Roth IRA?


Quick Answer

An individual should roll over assets from a 457(b) plan into a Roth IRA in a year where his income puts him in a lower tax bracket, claims Zacks Investment Research. This reduces the total amount of tax owed on the assets.

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Full Answer

The 457(b) plans are employer-sponsored retirement plans specifically for government agencies and certain non-profit organizations, states the IRS. Like 401(k) plans, employees contribute funds from their pay pre-tax, and the earnings are tax-deferred until retirement. Converting the funds into a Roth IRA allows the employee to pay the taxes before he retires, according to Zacks Investment Research. Those who expect to pay a higher tax rate when they retire may prefer to pay the taxes while they are still working. They must report the distribution from the 457(b) as income on their tax return for that year.

An individual cannot convert the assets in a 457(b) plan until he has left the agency or organization, reports Zacks Investment Research. Hardship and minimum distributions are not eligible. A bank can transfer the funds from the 457(b) to the Roth IRA, or an individual can roll the funds over by taking a distribution and depositing it within 60 days. A rollover incurs an automatic withholding of 20 percent for taxes.

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