Government Employee 457 Plans: Special Rollover Rules to Know

457(b) deferred compensation plans serve state and local government employees, and they operate under rules distinct from 401(k)s and 403(b)s. Understanding these differences matters when you change jobs, retire, or want to consolidate retirement accounts. The rollover rules that apply to your federal co-worker’s TSP don’t necessarily apply to your municipal 457.

What Makes 457 Plans Different

The 457(b) plan originated as a way for state and local governments to offer retirement savings without the funding requirements of traditional pensions. Unlike 401(k) plans sponsored by for-profit employers, 457 plans aren’t technically “qualified” retirement plans under the same section of the tax code.

The no-penalty advantage: 457 plans don’t impose the 10% early withdrawal penalty that hits 401(k) and IRA withdrawals before age 59½. Once you separate from service, you can access funds at any age without penalty—though ordinary income taxes still apply.

The double-dip opportunity: Government employees can often contribute maximum amounts to both a 457 plan and a 403(b) or 401(a) plan simultaneously. This effectively doubles the available tax-deferred savings space during employment.

Governmental vs. non-governmental: Only 457(b) plans sponsored by state and local governments allow rollovers to IRAs and other qualified plans. Non-governmental 457(b) plans (offered by tax-exempt organizations like hospitals and universities) have severe restrictions on rollovers—essentially, they can only roll to other non-governmental 457(b) plans.

Rollover Options for Governmental 457 Plans

When you leave government employment, your 457(b) funds can move to several destinations:

Traditional IRA: The most common choice. Pre-tax 457 funds roll tax-free to a Traditional IRA, where they continue growing tax-deferred until withdrawal in retirement.

Roth IRA: You can roll 457 funds directly to a Roth IRA, but you’ll owe income tax on the converted amount. This makes sense when you’re in a temporarily low tax bracket or expect higher rates in retirement.

New employer’s 401(k) or 403(b): If your next job offers a qualified retirement plan that accepts rollovers, you can transfer 457 funds there. This consolidates accounts and may provide access to institutional-class investments.

Another governmental 457: Moving between government employers allows 457-to-457 rollovers. This maintains the early withdrawal penalty exemption that IRAs and 401(k)s don’t provide.

The Early Access Consideration

Here’s where 457 rollover decisions get strategic. That penalty-free early access disappears when you roll 457 funds into an IRA or 401(k):

Keep in 457: Funds in the 457 plan remain accessible at any age after separation from service without the 10% penalty. Only income taxes apply.

Roll to IRA: Funds become subject to the standard 10% early withdrawal penalty before age 59½, with limited exceptions (disability, substantially equal periodic payments, etc.).

If you’re leaving government service before age 55 and might need retirement funds before traditional retirement age, think carefully before rolling out of a 457. The penalty-free access has genuine value.

Required Minimum Distributions

457 plans follow RMD rules similar to other retirement accounts:

Starting age: RMDs begin at age 73 (as of 2023 SECURE 2.0 rules, increasing to 75 by 2033).

Still employed exception: Unlike IRAs, if you’re still working for the employer sponsoring the 457, you can delay RMDs until you actually retire—regardless of age.

Roth 457: Roth contributions to 457 plans are no longer subject to RMDs starting in 2024, aligning with Roth IRA treatment.

Roth Components in 457 Plans

Many governmental 457 plans now offer Roth (after-tax) contribution options. Roth 457 funds follow separate rollover rules:

Roth 457 to Roth IRA: Direct rollover permitted, with the 5-year holding period carrying over if the 457 Roth has been open that long.

Roth 457 to Roth 401(k): Allowed if the receiving plan accepts Roth rollovers.

Cannot mix: Pre-tax 457 funds can’t roll to Roth accounts without triggering immediate taxation (as a Roth conversion).

Step-by-Step 457 Rollover Process

Step 1: Request distribution paperwork from your 457 plan administrator. Government plans often use state-specific forms.

Step 2: Choose direct rollover to avoid the mandatory 20% withholding that applies to distributions paid to you personally.

Step 3: Specify the receiving account with exact institution name, address, account number, and routing information.

Step 4: Confirm tax treatment—ensure pre-tax and Roth portions roll to appropriate matching accounts.

Step 5: Track the transfer and verify funds arrive within 2-4 weeks. Government plans sometimes process slower than private-sector plans.

Step 6: Report correctly on your tax return. Form 1099-R from the 457 plan should show a direct rollover (code G), meaning no tax due.

Common 457 Rollover Mistakes

Losing penalty-free access unnecessarily: If you might need funds before 59½, keeping money in the 457 or understanding the 72(t) SEPP rules before rolling matters.

Missing the non-governmental distinction: If your 457 comes from a hospital, private university, or non-governmental tax-exempt organization, rollover options are severely limited. Verify your plan type before assuming IRA rollover is possible.

Forgetting state income taxes: Some states tax 457 distributions differently than federal rules. Rolling to an IRA changes which state(s) may tax distributions based on where you live when taking withdrawals.

Mixing with non-retirement funds: 457 rollover funds must go to a dedicated rollover account, not commingled with non-rollover contributions. Some IRA providers require separate accounts.

When to Keep Your 457 Where It Is

Staying in the old 457 plan sometimes makes sense:

You’re under 55 and might need early access to funds
The plan offers excellent low-cost investment options
You might return to government employment and could consolidate later
Creditor protection in your state is stronger for 457 plans than IRAs

When Rolling Out Makes Sense

Moving to an IRA often wins when:

You want broader investment choices than the 457 offers
You’re consolidating multiple retirement accounts for simplicity
You’re over 59½ and the early withdrawal penalty doesn’t apply
The 457 plan has high administrative fees or limited options
You want to name beneficiaries more flexibly than the plan allows

Governmental 457 plans provide unique benefits that don’t exist in other retirement accounts. Before automatically rolling to an IRA like you would a 401(k), understand what you’re giving up. The early withdrawal flexibility alone justifies keeping funds in a 457 for many public-sector employees.