IRA Rollover

What are 457 Plans?

The “457 Plans” are deferred compensation plans conforming to section 457 of the Internal Revenue Code that are established by state and local governments and nonprofit organizations.

457 plans and similarity to 401k

State and local governments and private tax-exempt organizations may offer retirement plans to their employees that function similar to 401k plans in terms of salary reduction contributions and deferred growth of earnings. The name 457 plan comes from the Internal Revenue Code (IRC) section 457 that states the rules for 457 plans. Since these plans are non qualified deferred compensation (NQDC) plans they were not eligible for an IRA Rollover before 2002.

Now 457 rollover can be done similar to 401k Rollover

Effective 2002, governmental 457 Plans (but not private tax-exempt organization 457 Plans) qualify for IRA rollover or a rolling over into a qualified plan, such as a 401k Rollover.

From a tax standpoint, if you are not permitted to IRA rollover the 457 Plan, you may wish to explore the distribution options available (possibly spreading payments out over of a number of years) under the terms of the 457 Plan to determine the most suitable method to withdraw their balance.

Contribution to 457 plans

457 Plans usually allow some employees to defer the lesser of a percentage of compensation or $14,000 in 2005. This limit increases by $1,000 per year to $15,000 in 2006.

The limit determined by the 457 plan is up to the lesser of 100 percent of the participant’s includible compensation or the applicable dollar amount for the year.

For the last 3 taxable years before the participant attains normal retirement age under the plan, the ceiling is the lesser of twice the applicable dollar amount for that year or the sum of the applicable dollar amount for that particular year plus the amount of the plan ceiling for previous years that has not been used.

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