Government Employee 457 Plans: Special Rollover Rules to Know
457 plans have gotten surprisingly complicated with all the rule changes over the years. As someone who spent a decade advising public sector employees on retirement decisions, I learned everything there is to know about these quirky plans. Today, I will share it all with you.
These plans serve state and local government workers, and they play by different rules than your friend’s 401(k) at a private company. What works for a corporate TSP rollover doesn’t necessarily apply to your municipal 457. Get this wrong and you could lose benefits you didn’t know you had.
What Makes These Plans So Different
The 457(b) started as a way for governments to offer retirement savings without dealing with the funding headaches of traditional pensions. Unlike private-sector 401(k)s, they’re not technically “qualified” retirement plans under the same tax code section.
Here’s what that means in plain English:
No early withdrawal penalty. This is the big one. 457 plans don’t hit you with the 10% penalty for withdrawals before age 59.5. Once you leave your government job, you can tap those funds at any age without the penalty – only regular income taxes apply. I’ve seen people retire at 52 and start drawing from their 457 immediately while letting their IRA grow untouched. Probably should have led with this section, honestly.
Double contribution room. Government employees can often max out both a 457 and a 403(b) or 401(a) in the same year. That’s double the tax-deferred savings. If your agency offers multiple plans and you can swing it financially, take advantage.
Governmental vs. non-governmental matters. Only governmental 457(b) plans – the ones from actual state and local governments – allow rollovers to IRAs and other qualified plans. If your 457 comes from a hospital or private university (non-governmental), your rollover options are extremely limited. Like, basically nonexistent. You can only roll to another non-governmental 457. That’s it.
Where Your 457 Money Can Actually Go
When you leave government employment, here are your realistic options:
Traditional IRA. Most common choice. Pre-tax 457 funds roll over tax-free and keep growing until you withdraw in retirement. Simple.
Roth IRA. You can do this, but you’ll owe income taxes on the converted amount that year. Makes sense if you’re in a low bracket right now or expect rates to be higher later.
New employer’s 401(k) or 403(b). If your next gig accepts rollovers, you can consolidate there. Keeps things tidy and might get you into institutional-class funds.
Another governmental 457. This one’s interesting. Moving 457-to-457 keeps that penalty-free early access I mentioned. IRAs and 401(k)s don’t give you that.
The Early Access Trap Nobody Warns You About
Here’s where the rollover decision gets tricky. That penalty-free early access? It disappears the moment you roll 457 money into an IRA or 401(k).
If you keep the money in your 457 after leaving your government job, you can withdraw at any age without penalty. Just income taxes.
Roll that same money to an IRA? Now you’re stuck waiting until 59.5 (with limited exceptions) or paying the 10% penalty on top of income taxes.
I’m apparently one of those people who thinks carefully about these things, and here’s my take: if you’re leaving government before 55 and might need that money before traditional retirement age, think really hard before rolling out of your 457. That penalty-free access has genuine value.
RMDs and the Still-Working Exception
Required minimum distributions kick in at 73 now (moving to 75 eventually). Same as other retirement accounts.
But here’s a nice perk: if you’re still working for the government entity sponsoring your 457, you can delay RMDs until you actually retire – regardless of how old you are. The 75-year-old school board member who refuses to quit? No RMDs from the 457 until they finally call it.
Also, Roth 457 contributions are no longer subject to RMDs starting in 2024. They aligned it with Roth IRA treatment, which eliminated a weird inconsistency that confused everyone.
Roth 457 Rollover Rules
If you’ve been putting money into a Roth option within your 457:
Roth 457 to Roth IRA. Direct rollover works fine. If your Roth 457 has been open for 5+ years, that clock carries over to the IRA.
Roth 457 to Roth 401(k). Allowed if the receiving plan accepts Roth rollovers. Not all do.
Pre-tax and Roth can’t mix. Traditional 457 money can’t just roll into a Roth account without triggering immediate taxation. That would be a Roth conversion, and you’d owe taxes on the whole amount that year.
How to Actually Do a 457 Rollover
Here’s the step-by-step I give people:
Step 1: Get the distribution forms from your 457 plan. Government plans often use state-specific paperwork, so don’t expect the same forms your sister used for her 401(k).
Step 2: Choose direct rollover. This avoids the 20% mandatory withholding that applies if they cut you a check personally. “Make check payable to [IRA Custodian] FBO [Your Name].”
Step 3: Specify exactly where the money goes. Institution name, address, account number, routing information. Get it all right the first time.
Step 4: If you have both pre-tax and Roth money, make sure they’re going to the right places. Pre-tax to traditional IRA. Roth to Roth IRA.
Step 5: Be patient. Government plans sometimes move slower than private sector. Give it 2-4 weeks before you start making angry phone calls.
Step 6: When tax season comes, you’ll get a Form 1099-R. Code G means direct rollover, no tax due. Report it correctly and you’re done.
Mistakes I’ve Watched People Make
Rolling out and losing penalty-free access without realizing it. If you might need money before 59.5, the 457’s early access could be worth keeping. Understand what you’re giving up.
Assuming their 457 is governmental when it’s not. Hospital workers and university employees often have non-governmental 457s that can’t roll to IRAs at all. Check before you plan around an option that doesn’t exist.
Forgetting about state taxes. Some states tax 457 distributions differently. Rolling to an IRA changes which state taxes you based on where you live when you withdraw. If you’re retiring to Florida or Texas, this might matter.
Mixing rollover funds with regular contributions. Some IRA custodians require separate accounts for rollover money. Don’t just dump it into your existing IRA without asking.
When Staying Put Makes More Sense
Sometimes the right move is doing nothing:
- You’re under 55 and might need early access
- Your plan has fantastic low-cost investment options
- You might go back to government work and consolidate later
- Creditor protection in your state is stronger for 457 plans than IRAs
When Rolling Out Makes Sense
On the other hand, an IRA often wins when:
- You want broader investment choices than your 457 offers
- You’re consolidating accounts for simplicity
- You’re already past 59.5 and the early withdrawal penalty doesn’t matter
- Your 457 has high fees or limited options
- You want more flexibility in naming beneficiaries
That’s what makes the 457 decision interesting for us government employees – it’s not an automatic rollover like a private-sector 401(k). The early withdrawal flexibility alone justifies keeping funds in a 457 for a lot of people. Before you move anything, make sure you know exactly what you’re trading away.
