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Financial Planning / Tax Strategies
|Subject: Re: 457 Plan Rollover to Roth IRA||Date: 1/8/2013 5:59 PM|
|Author: TMFPMarti||Number: 117320 of 122008|
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.
The timeline of changes in the law isn't important. Your understanding of current law is correct.
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.
Ah yes, blame the gummint. Back when I had to travel by air, yet still pre "treat all passengers as criminals" days, I got to the ticket lift at my connecting gate at DFW only to be informed that I had to check in again at the gate counter to have my ID checked. This even though I had been issued a boarding pass for the connecting flight at my originating airport.
Moi: "They could have told me this when I checked in at DCA."
Airline functionary: "It's a new government requirement."
Moi (loudly): "It's a new government requirement that American Airlines surprise its customers with the news when they've already stood in line to board? Show me that in writing."
I digress. The rep's performance is just validation of their fine print that you shouldn't rely on them for tax advice. What they leave out is the reason--they don't know their butts from second base.
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.
You're catching on.
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).
You have no need for concern. Do a direct rollover from the 457 to a traditional IRA at your Roth custodian. Then convert from the traditional IRA to the Roth. The premature distribution penalty doesn't apply to conversions. Contributions don't count against your contribution limit, and none of these actions counts as a rollover against the 1 in 12 months limit.
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?
Tax law doesn't care. There are some cases in which it might be to your advantage to parcel the money around If you tell us more about your plans for investing the money we could fine tune this for you.
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