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A 457(b) plan is a tax-advantaged, employer-sponsored retirement plan offered to some government employees and employees of certain tax-exempt organizations. Although similar to 401(k)s and 403(b)s, 457(b)s have unique features that could offer more flexibility.

If you have been contributing to a 457(b) for years, you might be wondering what happens to that money when you retire or leave your job. One of the most common questions is whether you can roll those funds into an Individual Retirement Account (IRA). The answer is yes, but only if your 457(b) is a governmental plan. If it is a non-governmental plan, your options are far more limited.

Difference Between Government & Non-Government Plans

Governmental 457(b) plans, typically offered to public sector workers like police officers, teachers, or city employees, are more flexible. You can take money out of these accounts penalty-free at any age once you leave your job, and you can roll the funds into an IRA, 401(k), or 403(b) without triggering taxes if done correctly.

Non-governmental 457(b) plans, offered by some nonprofits and private hospitals, are more restrictive. The funds in these accounts legally belong to the employer until paid out, meaning they are subject to the employer’s creditors. You generally cannot roll them into an IRA. You are often stuck with either leaving the money where it is or taking a lump sum distribution, which could create a big tax bill.

What Happens After Retirement?

If you are retiring with a governmental 457(b) plan, you can leave your money in the plan, start taking withdrawals, or roll it into a different retirement account. Many retirees choose to roll their 457(b) into an IRA to consolidate their savings and take advantage of more investment options.

The process is straightforward: initiate a rollover through your plan administrator, choose between a traditional or Roth IRA and transfer the funds directly to avoid early taxes or penalties.

With a non-governmental plan, rollovers are usually not allowed. Your only potential option is a transfer to another similar plan at a new nonprofit employer, which is not very common. Most of the time, you’ll have to withdraw the funds and pay taxes shortly after leaving your job.

Why Roll Into an IRA?

Rolling your 457(b) into an IRA often provides you with a wider array of investment choices and more control over withdrawals. A traditional IRA allows continued tax deferral, while a Roth IRA gives you tax-free withdrawals later, though you will have to pay income tax on the rollover amount upfront. 

There is also the convenience factor. Having multiple retirement accounts with different employers can be confusing. Consolidating into a single IRA can make it easier to manage your investments and plan your distributions.

What if You are Still Working?

Thinking of rolling over your 457(b) while you are still employed? In most cases, you will have to wait. Rollovers are generally only allowed once you leave your job, retire, or meet another qualifying event like plan termination or disability. Some plans may allow limited in-service withdrawals, but those are exceptions.

So, unless your plan allows it, the funds stay where they are while you are still working. It is best to check with your plan administrator for the specific rules.

Strategic Moves to Minimize Taxes

Whether you are managing a rollover or simply drawing from your 457(b), consider how distributions affect your overall income. Pairing your withdrawals with Social Security or pension income can help you avoid slipping into a higher tax bracket.

Also, think twice before doing a Roth conversion with your entire balance in one year, as it could lead to a hefty tax bill. A financial advisor can help you plan the timing and amount of withdrawals to reduce your long-term tax exposure.

Bottom Line

You can roll a 457(b) plan into an IRA but only if it is a governmental plan. Non-governmental plans often come with stricter rules and more tax headaches. 

Rolling your 457(b) into an IRA can simplify your finances, expand your investment choices and offer continued tax-deferred growth. But because the rules vary depending on your employment and plan type, it is worth consulting a financial advisor before making any moves. The right strategy can help you stretch your savings and enjoy a more financially secure retirement.