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Financial Planning / Tax Strategies
|Subject: 457 Plan Rollover to Roth IRA||Date: 1/8/2013 4:45 PM|
|Author: MakingTrax||Number: 117318 of 121338|
I have 457(b) deferred compensation plan from a previous (government) employer that I would like to rollover/convert into an existing Roth IRA account.
To the best of my knowledge, this 457 plan is “an eligible state or local government section 457 deferred compensation plan,” and therefore a “qualified retirement plan” for purposes of addressing eligible rollovers (per IRS Publication 575). My research indicates that I should be able to rollover/convert directly from a qualified employer sponsored plan to my Roth IRA custodian account via a “trustee to trustee” transfer. In other words, move the 457(b) funds directly into a Roth IRA without having to go through any additional interim steps. The amount transferred would be fully taxable as income (since the 457 funds were initially pre-tax). My understanding of this capability is based on the rollovers discussion in Pub 575, as well as from this chart (http://www.irs.gov/pub/irs-tege/rollover_chart.pdf) and other miscellaneous articles found from goggling the topic. I recall reading somewhere too that the rollover to Roth option is relatively new (2010?), as the original option to rollover that was established in 2001/2002 was limited to traditional IRAs at the time.
However, I contacted my Roth IRA custodian who told me that a direct rollover/conversion is not possible according to IRS rules, and that a 3-step process (i.e., 457 > Rollover IRA > Roth IRA) is required. While I can understand that certain custodians may not be set-up to handle the more direct 2-step process (and thus not allowed through that institution), the rep insisted that it is not allowed due to IRS restrictions. I next contacted the 457 plan custodian, who also said that the funds could only be rolled over to an IRA. But he also went on to say that I would need to recharacterize the funds and that these would count as contributions, blah blah...so I don’t think the 457 rep really knew what he was talking about.
My goal is to consolidate accounts by closing out the 457. I’d prefer the funds to go into my Roth IRA, rather than Traditional IRA. I don’t mind having to pay taxes on the 457 funds as income, but don’t want to pay any penalties (as for early withdraw, my age is under 55). Ultimately, I want the funds going into the Roth to be counted as a rollover or conversion (no limits) rather than a contribution (subject to annual contribution and income limits).
Can someone please clarify the tax rules on a 457 plan rollover or offer any insight for the conflicting information from account custodians?
Also, if I do have to go through the 3-step process, does the 457 rollover into the Traditional IRA (or even the Roth IRA) then use up my one rollover per year limit (assuming that I have only a single account for each type)? Also, is there any reason that I would want to track these rolled over funds separately (such as in a separate rollover IRA/Roth IRA under a different custodian)…any guidance?
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