Pros or Cons of Moving 401K to 457B

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onyxlinkia
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Pros or Cons of Moving 401K to 457B

Post by onyxlinkia »

Hello, I still have my 401K portfolio with my previous employer and I've changed my job to a state agency (457B). The current job offers better selection of investment funds at much lower expense cost. This is my first gig with gov/state agency.

I'm curious if there is any cons of moving all or part of my 401K portfolio to 457B or anything else that I need to be aware of.

One issue/concern that I need to address is that my previous 401K plan allows after tax contribution (contribution over the annual limit). I have about 14K for after tax contribution. I'm assuming that I need to withdraw this amount before transferring to 457B plan.

Thanks.

jand87
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Re: Pros or Cons of Moving 401K to 457B

Post by jand87 »

Fellow government employee here who also participates in 457b. If your 457b has as good as options as you say then I think it's okay to transfer it over. How close are you to retirement, age, balance, etc? The one big benefit of the 457b of course is penalty free withdrawals before 59, so it could be beneficial to roll it over to the 457 if you maybe think you might ever do something like that. Also, do you think you'll stay with the employer for a long period of time? I ask these questions because I think the IRA has more flexibility and may be worth it to roll it over to an IRA. My 457 for example has very limited fund choices, and offers no fund with an expense ratio below .20. The bond funds are also not very appealing. If yours is better than that's awesome.

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Duckie
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Re: Pros or Cons of Moving 401K to 457B

Post by Duckie »

onyxlinkia wrote:One issue/concern that I need to address is that my previous 401K plan allows after tax contribution (contribution over the annual limit). I have about 14K for after tax contribution. I'm assuming that I need to withdraw this amount before transferring to 457B plan.

You don't withdraw. When you transfer you have the pre-tax amount sent to the 457b plan and the after-tax amount (plus earnings) sent to your Roth IRA. You will pay taxes on the earnings.

Spirit Rider
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Re: Pros or Cons of Moving 401K to 457B

Post by Spirit Rider »

With a 457 plan, you can make taxable but penalty-free withdrawals at anytime after separation. They make great accounts for early retirement. A small point, unlike 401k plans, 457b plans are not ERISA Title I qualified and do not receive ERISA asset protections. However, many states extend state level creditor protection.

An IRA may have more flexibility, but you lose the 457b withdrawal options when rolled over to an IRA. Penalty-free withdrawals normally only available at age 59 1/2.

Alan S.
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Re: Pros or Cons of Moving 401K to 457B

Post by Alan S. »

Note that if you roll a 401k balance to a 457, the amount rolled from the 401k and it's subsequent gains will not acquire the 457 plan penalty exception per Sec 72(t)(9):

72(t)(9)
SPECIAL RULE FOR ROLLOVERS TO SECTION 457 PLANS. --For purposes of this subsection, a distribution from an eligible deferred compensation plan (as defined in section457(b)) of an eligible employer described in section 457(e)(1)(A) shall be treated as a distribution from a qualified retirement plan described in 4974(c)(1) to the extent that such distribution is attributable to an amount transferred to an eligible deferred compensation plan from a qualified retirement plan (as defined in section 4974(c)).

However, if you roll the 401k to the 457 and then separate from the 457 employer in the year you reach 55 or later, all distributions from the 457 will be penalty free because the former 401k money will now qualify for the age 55 separation exception.

megabad
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Re: Pros or Cons of Moving 401K to 457B

Post by megabad »

Alan S. wrote: ↑Tue Mar 05, 2019 6:59 pm Note that if you roll a 401k balance to a 457, the amount rolled from the 401k and it's subsequent gains will not acquire the 457 plan penalty exception per Sec 72(t)(9):

Good point from Alan (as always). We had a situation where I was worried about this and so I just rolled the 401k into the 403b plan instead (my old job offered both a 457 and a 403b). In speaking with a coworker who rolled a 401k into the 457, he just said they label the subaccounts differently and basically keep track of the different balances separately (Rollover vs normal contributions). I guess this helps keep track of which portion is available for penalty free withdrawal.

retire2022
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Re: Pros or Cons of Moving 401K to 457B

Post by retire2022 »

Op

I would move the 401K to Vanguard directly, if you should decide to either contribute to an IRA or Roth IRA or leave your present job, you could eventually consolidate the 457b balance to Vanguard.

Once your accounts are consolidated to Vanguard, you will find their fees are lower generally and choices broader as well as eventual privilege with a larger account balance, starting over 50K.

I plan to move half of my 457b 1.0 million balance to my Vanguard account, which includes a Roth IRA account balance 420K, later this year. With million balance Vanguard will allow for closed fund purchases, i.e. Vanguard PrimeCap, Capital Opportunity, and Vanguard Dividend Growth.

Here is a link to IRS publication 590a.pdf page 22 which illustrates what can be transferred to and from

https://www.irs.gov/pub/irs-pdf/p590a.pdf

Spirit Rider
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Re: Pros or Cons of Moving 401K to 457B

Post by Spirit Rider »

Alan S. wrote: ↑Tue Mar 05, 2019 6:59 pm Note that if you roll a 401k balance to a 457, the amount rolled from the 401k and it's subsequent gains will not acquire the 457 plan penalty exception per Sec 72(t)(9):

72(t)(9)
SPECIAL RULE FOR ROLLOVERS TO SECTION 457 PLANS. --For purposes of this subsection, a distribution from an eligible deferred compensation plan (as defined in section457(b)) of an eligible employer described in section 457(e)(1)(A) shall be treated as a distribution from a qualified retirement plan described in 4974(c)(1) to the extent that such distribution is attributable to an amount transferred to an eligible deferred compensation plan from a qualified retirement plan (as defined in section 4974(c)).

Every day you learn a new special rule from Alan is a good day.

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onyxlinkia
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Re: Pros or Cons of Moving 401K to 457B

Post by onyxlinkia »

Hi All,

Thanks for your great feedback, really appreciate it. Wow, I didn't realize that one of the benefits of 457B is that I can withdraw the money penalty free at age 55. I need to find out if CA provides ERISA asset protection.

The reason why I don't plan to roll my 401K into Vanguard's ROTH IRA is because I read that it might affect my annual backdoor roth contribution.

Thanks.

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Duckie
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Re: Pros or Cons of Moving 401K to 457B

Post by Duckie »

onyxlinkia wrote:The reason why I don't plan to roll my 401K into Vanguard's ROTH IRA is because I read that it might affect my annual backdoor roth contribution.

Rolling your former 401k directly to your Roth IRA without detouring through a TIRA does not affect the backdoor method. But you'll still have to pay taxes on the pre-tax amount of the rollover/conversion.

krow36
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Re: Pros or Cons of Moving 401K to 457B

Post by krow36 »

onyxlinkia wrote: ↑Wed Mar 06, 2019 4:03 pm Thanks for your great feedback, really appreciate it. Wow, I didn't realize that one of the benefits of 457B is that I can withdraw the money penalty free at age 55. I need to find out if CA provides ERISA asset protection.

The benefit of the 457b over other plans is that you can withdraw the money penalty free at any age after you have ended employment with the plan's sponsor.
The Alan S. post explained that if you move your 401k account into your 457b plan, the 401k sub account can have penalty free withdrawals at separation at age 55, rather than waiting until the usual age 59.5. Of course the withdrawals will be taxable unless it's a designated Roth 401k or Roth 457b.

petulant
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Re: Pros or Cons of Moving 401K to 457B

Post by petulant »

retire2022 wrote: ↑Wed Mar 06, 2019 6:42 pm Op

Please be aware with 457b you may be better off, depending on your age and tax bracket to go with a Roth 457b if your employer offers it, with pension and large 457b balance you may take a hit under Social Security IRMAA, which stands for income-related monthly adjustment amount

https://www.healthmarkets.com/resources ... -is-irmaa/

You know, I keep seeing these references to IRMAA, and I just made a mental note that Medicare expenses take some management starting at 63. But reading the article you posted, the thresholds seem very high, and then the actual costs start at $13/mo and max at $75/mo—$900 a year. Caring about it compared to other tax/investment issues seems like a good way to let the tail wag the dog. Am I missing something?

retire2022
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Re: Pros or Cons of Moving 401K to 457B

Post by retire2022 »

petulant wrote: ↑Wed Mar 06, 2019 6:51 pm
You know, I keep seeing these references to IRMAA, and I just made a mental note that Medicare expenses take some management starting at 63. But reading the article you posted, the thresholds seem very high, and then the actual costs start at $13/mo and max at $75/mo—$900 a year. Caring about it compared to other tax/investment issues seems like a good way to let the tail wag the dog. Am I missing something?

Petulant it depends on at the end of the day what you have in the 457b balance and whether or not reduction of medicare impact said person or if one has alternative healthcare plan instead of Medicare.

edit Also as well as Required Minimum Distribution will impact your age at retirement and withdrawal rate at 70.5

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onyxlinkia
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Re: Pros or Cons of Moving 401K to 457B

Post by onyxlinkia »

Hi, I called Fidelity who is managing my current 457b about rolling my 401K plan from another administrator into 457b. I specifically asked about the penalty free withdrawal of the 457b if I leave my current employer before reaching 59.5. Fidelity rep said the rollover amount will be tracked and might be subjected to the early withdrawal penalty. Is this correct?

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Clever_Username
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Re: Pros or Cons of Moving 401K to 457B

Post by Clever_Username »

onyxlinkia wrote: ↑Fri Apr 05, 2019 3:19 pm Hi, I called Fidelity who is managing my current 457b about rolling my 401K plan from another administrator into 457b. I specifically asked about the penalty free withdrawal of the 457b if I leave my current employer before reaching 59.5. Fidelity rep said the rollover amount will be tracked and might be subjected to the early withdrawal penalty. Is this correct?

Almost certainly. One of the big advantages of the 457(b) is the penalty-free withdrawals before 59.5, and the 401(k) section doesn't allow for that.

"What was true then is true now. Have a plan. Stick to it." -- XXXX, _Layer Cake_ | | I survived my first downturn and all I got was this signature line.

retire2022
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Re: Pros or Cons of Moving 401K to 457B

Post by retire2022 »

Clever_Username wrote: ↑Fri Apr 05, 2019 4:46 pm

onyxlinkia wrote: ↑Fri Apr 05, 2019 3:19 pm Hi, I called Fidelity who is managing my current 457b about rolling my 401K plan from another administrator into 457b. I specifically asked about the penalty free withdrawal of the 457b if I leave my current employer before reaching 59.5. Fidelity rep said the rollover amount will be tracked and might be subjected to the early withdrawal penalty. Is this correct?

Almost certainly. One of the big advantages of the 457(b) is the penalty-free withdrawals before 59.5, and the 401(k) section doesn't allow for that.

Clever_Username

Since I never had a 401K my understanding is that 72(t) rule which allows for penalty free distribution. Here is a link on this subject, others who have done this may want to chime in.

https://www.investopedia.com/terms/r/rule72t.asp

here is IRS FAQ on this as well:

https://www.irs.gov/retirement-plans/re ... c-payments

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onyxlinkia
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Re: Pros or Cons of Moving 401K to 457B

Post by onyxlinkia »

Clever_Username ,

Just to clarify, the rollover from 401K to 457b will be penalty-free withdrawal or not?

Thanks.

Clever_Username wrote: ↑Fri Apr 05, 2019 4:46 pm

onyxlinkia wrote: ↑Fri Apr 05, 2019 3:19 pm Hi, I called Fidelity who is managing my current 457b about rolling my 401K plan from another administrator into 457b. I specifically asked about the penalty free withdrawal of the 457b if I leave my current employer before reaching 59.5. Fidelity rep said the rollover amount will be tracked and might be subjected to the early withdrawal penalty. Is this correct?

Almost certainly. One of the big advantages of the 457(b) is the penalty-free withdrawals before 59.5, and the 401(k) section doesn't allow for that.

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onyxlinkia
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Re: Pros or Cons of Moving 401K to 457B

Post by onyxlinkia »

retire2022,

Thanks for the link, I'm not anywhere near retirement yet but would like to know the options:)

retire2022 wrote: ↑Sat Apr 06, 2019 11:12 am Op

I was reminded that once you retire with 457b established you could rollover your pension check. I cannot speak on your state, nor mine but this thread needs to be reviewed and the option considered as well.

viewtopic.php?t=237321#p3712347

Spirit Rider
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Re: Pros or Cons of Moving 401K to 457B

Post by Spirit Rider »

onyxlinkia wrote: ↑Mon Apr 08, 2019 4:35 pm Just to clarify, the rollover from 401K to 457b will be penalty-free withdrawal or not?

Clever_Username wrote: ↑Fri Apr 05, 2019 4:46 pm

onyxlinkia wrote: ↑Fri Apr 05, 2019 3:19 pm Hi, I called Fidelity who is managing my current 457b about rolling my 401K plan from another administrator into 457b. I specifically asked about the penalty free withdrawal of the 457b if I leave my current employer before reaching 59.5. Fidelity rep said the rollover amount will be tracked and might be subjected to the early withdrawal penalty. Is this correct?

Almost certainly. One of the big advantages of the 457(b) is the penalty-free withdrawals before 59.5, and the 401(k) section doesn't allow for that.

401k rollover contributions and earnings to a 457b plan retain the 401k distribution rules. Only 457b contributions or rollovers of such can be distributed at any time penalty free.

The 401k rollover contributions and earnings can generally only be withdrawn penalty free >= age 59 1/2. However, there is an early withdrawal penalty exception if you separate from the 457b plan >= the year you turn age 55.

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onyxlinkia
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Re: Pros or Cons of Moving 401K to 457B

Post by onyxlinkia »

Spirit Rider, thanks for the clarification.

Spirit Rider wrote: ↑Mon Apr 08, 2019 6:29 pm

onyxlinkia wrote: ↑Mon Apr 08, 2019 4:35 pm Just to clarify, the rollover from 401K to 457b will be penalty-free withdrawal or not?

Clever_Username wrote: ↑Fri Apr 05, 2019 4:46 pm

onyxlinkia wrote: ↑Fri Apr 05, 2019 3:19 pm Hi, I called Fidelity who is managing my current 457b about rolling my 401K plan from another administrator into 457b. I specifically asked about the penalty free withdrawal of the 457b if I leave my current employer before reaching 59.5. Fidelity rep said the rollover amount will be tracked and might be subjected to the early withdrawal penalty. Is this correct?

Almost certainly. One of the big advantages of the 457(b) is the penalty-free withdrawals before 59.5, and the 401(k) section doesn't allow for that.

401k rollover contributions and earnings to a 457b plan retain the 401k distribution rules. Only 457b contributions or rollovers of such can be distributed at any time penalty free.

The 401k rollover contributions and earnings can generally only be withdrawn penalty free >= age 59 1/2. However, there is an early withdrawal penalty exception if you separate from the 457b plan >= the year you turn age 55.