Should You Roll Over Your Governmental 457(b)?
Retirement does not automatically mean that a governmental 457(b) should be moved into an IRA. The 457(b) has tax and distribution characteristics that can be especially valuable to firefighters, police officers and other public employees. Before moving the money, understand what you currently have — and what could change after a rollover.
What is a governmental 457(b)?
A governmental 457(b) is an employer-sponsored deferred-compensation plan offered by eligible state and local governmental employers.
It is commonly available to employees such as:
- Firefighters
- Police officers
- Paramedics
- Other municipal employees
- State employees
- Other eligible public-sector workers
Why the rollover decision matters
A rollover can look simple:
move money from one tax-deferred account into another tax-deferred account.
But the account type matters.
A rollover can potentially change:
- Early-distribution tax treatment
- Investment choices
- Fees and expenses
- Available withdrawal methods
- Creditor-protection characteristics
- Beneficiary provisions
- Plan services
- Access to institutional investments
- Future rollover choices
Your major choices at retirement
Leave It in the 457(b)
Depending on the plan, former employees may be able to leave assets in the governmental 457(b) and continue using the plan's investments and distribution provisions.
Take Distributions
Eligible participants may take distributions according to the plan's distribution rules and applicable federal tax law.
Roll to an IRA
Eligible amounts can generally be rolled to a traditional IRA, preserving current tax deferral when completed properly.
Roll to Another Employer Plan
Eligible amounts may be rolled to another eligible employer retirement plan that accepts rollovers.
Use More Than One Strategy
Depending on plan rules, individual circumstances and distribution options, retirement assets do not necessarily need to follow one single path.
The 457(b) early-distribution advantage
One of the most important characteristics of a governmental 457(b) is its treatment under the federal additional tax on early retirement distributions.
In general, native governmental 457(b) distributions are not subject to the 10% additional tax that commonly applies to certain retirement-plan or IRA distributions before age 59½.
Example
A firefighter retires at age 48 and has money accumulated directly inside a governmental 457(b).
If the firefighter qualifies to take distributions under the plan, distributions of those native governmental 457(b) amounts generally are not subject to the federal 10% additional early-distribution tax.
Ordinary income tax can still apply to taxable distributions.
Why rolling a 457(b) into an IRA can change things
A traditional IRA has different early-distribution rules.
If governmental 457(b) money is rolled into an IRA, later withdrawals are governed by the IRA distribution rules.
That means a taxable IRA withdrawal before age 59½ may be subject to the 10% additional tax unless an IRA exception applies.
The rollover itself can generally be completed tax-deferred when properly structured.
The concern is what happens to the rules governing future distributions.
The public-safety age-50 exception is different
Federal tax law also contains a separate early-distribution exception for certain qualified public-safety employees who separate from service during or after the year they reach age 50.
That rule can apply to qualifying governmental retirement plans.
However, the public-safety separation exception generally does not apply to an IRA.
Watch out for money rolled INTO the 457(b)
There is another important distinction.
Not every dollar sitting inside a governmental 457(b) necessarily receives identical early-distribution treatment.
IRS guidance generally provides that distributions attributable to amounts previously rolled into the governmental 457(b) from certain qualified retirement plans, 403(b) plans or IRAs can remain subject to the 10% additional tax rules.
Leaving money in the governmental 457(b)
Keeping retirement assets inside the existing plan can sometimes be overlooked.
Potential reasons to consider leaving at least some assets in the plan can include:
- Preserving governmental 457(b) distribution characteristics
- Competitive institutional investment options
- Potentially lower investment expenses
- Familiar plan administration
- Plan-specific creditor protections
- Keeping retirement accounts consolidated with the employer plan
Potential disadvantages may include:
- A more limited investment menu
- Less investment customization
- Plan administrative limitations
- Potentially limited advice or portfolio-management services
Actual features depend on the specific plan.
Rolling to an IRA
An IRA can provide significant investment flexibility.
Depending on the custodian and investment platform, an IRA may provide access to:
- Stocks
- Bonds
- ETFs
- Mutual funds
- Managed portfolios
- Certificates of deposit
- Certain annuities
- Other eligible investments
But the rollover should be evaluated based on the complete comparison — not investment choice alone.
Rolling to another employer retirement plan
Eligible governmental 457(b) amounts may generally be rolled to another eligible employer plan if the receiving plan accepts rollovers.
Potential receiving plans can include certain:
- Governmental 457(b) plans
- 401(k) plans
- 403(b) plans
- Other eligible qualified employer plans
The receiving plan is not necessarily required to accept the rollover.
Direct rollover versus receiving the money personally
How the rollover is completed matters.
With a direct rollover, the eligible retirement-plan distribution moves directly to the receiving eligible retirement account.
A properly completed direct rollover generally avoids the mandatory 20% federal income-tax withholding that applies when an eligible rollover distribution is instead paid directly to the participant.
Simple rollover illustration
Assume a retiree has an eligible $100,000 governmental 457(b) distribution.
| Method | General Federal Withholding Treatment |
|---|---|
| Direct rollover to eligible IRA or plan | Mandatory 20% rollover-distribution withholding generally does not apply |
| Eligible rollover distribution paid directly to participant | Generally subject to 20% mandatory federal withholding on the taxable eligible rollover amount |
Individual tax circumstances vary. This is a general illustration, not individualized tax advice.
457(b), DROP and the FRS
A retiring Florida firefighter may have several separate retirement resources:
- An FRS pension
- DROP proceeds
- A governmental 457(b)
- IRAs
- Roth accounts
- Taxable investments
These accounts do not automatically need to be combined.
In some circumstances, maintaining separate accounts can preserve different tax, investment, liquidity and distribution characteristics.
Learn more:
Should 457(b) money be used to purchase an annuity?
An annuity may be one potential destination or investment for some retirement assets, but moving 457(b) assets into an annuity should not be automatic.
The retiree should first determine the objective.
Depending on the contract, an annuity may provide features related to:
- Predictable interest crediting
- Defined downside protection
- Market-linked growth potential
- Lifetime-income guarantees
- Death-benefit features
But the comparison should also consider:
- Surrender periods
- Liquidity
- Contract expenses
- Optional rider charges
- Caps or participation rates
- Market risk where applicable
- What 457(b) characteristics are being given up
Read: Annuities Explained .
457(b) versus managed investments
Retirement assets may also be invested using diversified managed portfolios.
Managed investment accounts can offer:
- Broad investment selection
- Professional portfolio management
- Liquidity depending on account structure
- Portfolio customization
They can also involve:
- Market losses
- Advisory fees
- Underlying investment expenses
- No insurance guarantee on ordinary securities
Compare: Annuities vs. Managed Accounts .
Questions to ask before rolling over a 457(b)
- How old am I?
- Will I need distributions before age 59½?
- How much pension income will I receive?
- What are the current 457(b) investment expenses?
- What investments are available in the plan?
- Does the plan permit partial distributions?
- Does my account contain money rolled in from another plan?
- How does the plan track rollover money?
- What would an IRA cost?
- What additional services would the IRA provide?
- What early-distribution rules would change?
- What creditor protections would change?
- What beneficiary options would change?
- Do I actually need to consolidate the account?
- What reasonable alternatives have been considered?
Frequently asked questions
Do I have to roll my 457(b) over when I retire?
No. Depending on the plan, former employees may be able to leave assets in the governmental 457(b), take distributions or complete an eligible rollover.
Can I withdraw governmental 457(b) money before age 59½?
If the plan permits the distribution, native governmental 457(b) distributions generally are not subject to the federal 10% additional early-distribution tax. Ordinary income tax may still apply.
Can I roll a governmental 457(b) into an IRA?
Eligible governmental 457(b) distributions generally can be rolled into a traditional IRA.
Will I lose the 457(b) early-distribution treatment after rolling into an IRA?
Future IRA distributions are generally governed by IRA early-distribution rules. A withdrawal before age 59½ may be subject to the 10% additional tax unless another IRA exception applies.
Are all amounts inside a governmental 457(b) exempt from the 10% additional tax?
Not necessarily. Amounts attributable to certain rollovers into the governmental 457(b) from other retirement plans or IRAs may be treated differently.
Should a firefighter automatically roll a 457(b) into an IRA?
No. Investment options, fees, liquidity, early-distribution rules, services and other plan features should be compared before making the decision.
This material is provided for general educational and informational purposes only. It is not individualized investment, insurance, tax, legal or retirement-plan advice.
Governmental 457(b) plans differ in their investment choices, fees, distribution provisions, administrative procedures and rollover rules.
Federal tax laws and retirement-plan rules can change. Participants should review current plan documents and confirm distribution and rollover provisions with the plan administrator before moving retirement assets.
Tax consequences depend on individual circumstances. Consult an appropriate tax professional regarding individual tax matters.
Investing involves risk, including possible loss of principal.