Should Firefighters Leave Money in a 457(b) or Roll It to an IRA?
Neither choice is automatically better. A rollover can provide advantages in some situations, while keeping assets in a governmental 457(b) can preserve features that may be particularly valuable to firefighters who retire before age 59½.
A rollover is optional—not an automatic retirement step
Retirement often triggers a conversation about moving money from an employer-sponsored retirement plan to an IRA.
An IRA can offer useful features, but a rollover also changes the type of account holding the money. That can change rules that matter to a firefighter who retires relatively young.
The appropriate comparison depends on the firefighter's age, expected need for withdrawals, investment preferences, plan costs, available services and overall retirement-income strategy.
Why the governmental 457(b) deserves special attention
Governmental 457(b) plans have a federal tax characteristic that distinguishes them from many other retirement accounts.
According to the IRS, distributions from a governmental 457(b) generally are not subject to the 10% additional tax on early distributions.
An important exception applies to amounts attributable to money that entered the 457(b) through rollovers from certain other retirement plans or IRAs.
IRS source: Exceptions to Tax on Early Distributions
What may favor leaving money in the 457(b)?
Depending on the specific plan and the retiree's circumstances, reasons to consider leaving some or all of the money in the governmental 457(b) can include:
- preserving the governmental 457(b) early-distribution tax treatment;
- competitive institutional investment options or plan pricing;
- access to plan-specific investment choices unavailable elsewhere;
- familiarity with an existing account and investment structure;
- retirement distribution features offered by the plan; and
- avoiding an unnecessary transaction when the existing plan already meets the retiree's needs.
Not every governmental 457(b) offers the same investments, services or distribution flexibility, so the actual plan document matters.
What may favor rolling money to an IRA?
Depending on the IRA provider and the individual's needs, reasons to consider an IRA rollover can include:
- a broader range of available investments;
- consolidating multiple retirement accounts;
- access to different advisory or account-management services;
- different withdrawal or account-administration features;
- different beneficiary or estate-planning capabilities; and
- simplifying household investment management.
These potential benefits should be compared with fees, investment expenses, services and any plan-specific features that would be lost by completing the rollover.
The comparison becomes more important before age 59½
Consider a firefighter who retires at age 50 or 52.
The firefighter may still have many years before reaching age 59½. If retirement assets may be needed during that period, the existing governmental 457(b) distribution rules can have substantial practical importance.
If the entire governmental 457(b) is moved to an IRA, the IRA's rules generally govern subsequent IRA withdrawals.
A better question is: "Which features do I gain, and which features might I give up if I move the account?"
A partial rollover may sometimes be worth evaluating
The decision does not necessarily have to be all-or-nothing.
If the governmental 457(b) plan permits partial distributions or partial rollovers, a retiree may be able to evaluate whether keeping a portion in the plan while moving another portion is appropriate.
Plan rules vary, so this possibility must be confirmed with the plan administrator before assuming it is available.
Governmental 457(b) versus IRA: questions to compare
| Issue | Governmental 457(b) | IRA |
|---|---|---|
| 10% additional tax before 59½ | Generally does not apply to governmental 457(b) distributions, except certain rolled-in amounts. | Generally applies to taxable early distributions unless an IRA exception applies. |
| Investment choices | Limited to the investments made available by the plan. | Can offer a substantially broader investment universe, depending on the provider. |
| Fees and expenses | May benefit from institutional pricing, but plan expenses vary. | Varies widely by provider, investments and advisory services. |
| Account consolidation | May remain separate from other retirement assets. | Can potentially consolidate multiple eligible retirement accounts. |
| Distribution options | Determined by the specific plan. | Often flexible, but IRA and custodian rules apply. |
| Advice and management | Depends on services offered by the plan. | May provide access to a wider range of advisory arrangements. |
How a direct rollover works
When an eligible employer-plan distribution is rolled directly to another eligible retirement plan or traditional IRA, the amount properly rolled over generally is not included in current taxable income. Different tax treatment can apply to a rollover or conversion to a Roth IRA.
The IRS also explains that mandatory 20% federal income-tax withholding generally does not apply when the employer plan sends an eligible rollover distribution directly to the receiving IRA or retirement plan.
If an eligible employer-plan distribution is instead paid directly to the participant, the plan generally must withhold 20% for federal income taxes, even when the participant intends to complete a rollover later.
IRS source: Rollovers of Retirement Plan and IRA Distributions
Example: firefighter retires at 52
Assume a firefighter retires at age 52 with a substantial governmental 457(b) balance.
The firefighter expects to use part of the account during the next several years.
In that situation, preserving access to governmental 457(b) assets may deserve particular consideration before an IRA rollover because of the federal early-distribution rules.
That does not automatically mean the entire account should remain in the 457(b). Investment choices, costs, income needs and other retirement assets also matter.
Example: firefighter retires after age 59½
For a firefighter already older than 59½, the governmental 457(b)'s special treatment of early distributions may be less important because the age-based 10% additional tax is generally no longer the same concern.
The comparison may then focus more heavily on investment options, expenses, account services, consolidation, withdrawal flexibility and the retiree's overall financial plan.
Seven questions to ask before rolling over a 457(b)
The rollover decision should come after the comparison
There is no universal answer to whether a retired firefighter should leave money in a governmental 457(b) or roll it to an IRA.
A rollover can provide meaningful advantages in the right circumstances. Keeping assets in the existing governmental plan can also preserve valuable features.
The important step is to understand the differences before changing the type of account that holds the retirement assets.
Understand the retirement rules before moving the money.
Governmental 457(b) plans are only one part of firefighter retirement planning. Pension benefits, DROP, Social Security, Medicare, beneficiaries and retirement income should be considered together.
Mark Buckley
Mark Buckley is a retired Miami-Dade Fire Rescue firefighter and paramedic, author of Beyond the Firehouse, and a Financial Professional with Prudential Advisors.
His educational work focuses on retirement issues affecting firefighters and first responders, including pensions, governmental 457(b) plans, DROP programs, Social Security, Medicare and retirement income.
About MarkVerify rollover and distribution rules at the source.
Federal tax rules change and individual circumstances differ. Review current IRS guidance and the provisions of your specific governmental 457(b) plan before making a rollover or distribution decision.