Rolling out a Def Comp plan

Submitted by Tony Pondel on Thu, 2012-03-01 20:16

I have a client with a deferred comp plan who is retiring in six months.

Since I don’t see these that often, what are the rules governing taking the funds when they leave? Rollovers? Cash in?
What type of information do I need to make the determinations?

Thanks.

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Permalink Submitted by Philip Detlefs on Thu, 2012-03-01 21:16

Once your client leaves his/her employer, they can rollover their deferred comp plan to any IRA or other qualified plan they wish. However, one distinct advantage to a deferred comp plan is that even if they haven’t reached age 59 1/2, the participant can access their funds when they separate from service without the 10% penalty from the IRS. They will still pay taxes on the withdrawals. So, if this client is under the age of 59 1/2, and may want access to the funds prior to that age without the IRS penalty, it may benefit them to leave it in the deferred comp plan.

Permalink Submitted by Alan Spross on Thu, 2012-03-01 22:04

Note that a government 457b plan can be rolled over to an IRA.

A non government 457b plan or a 457f plan cannot be rolled over to an IRA.

Permalink Submitted by Tony Pondel on Tue, 2012-03-06 16:10

Alan:

This is a non-Govt Def Comp. Is there anyway to avoid taxation?
Any other rollover options?

Thanks

Permalink Submitted by Alan Spross on Tue, 2012-03-06 17:29

The only rollover option would be to another 457b plan that would accept such a rollover.

Permalink Submitted by Tony Pondel on Tue, 2012-03-06 17:36

So she will have to take the entire amount out and pay taxes.

Permalink Submitted by Alan Spross on Tue, 2012-03-06 17:51

Right.
But the plan may allow her to spread the distribution over more than one year and that will reduce the tax bite. She should find out from the plan administrator what her distribution requirements/options are so that she can do some tax plannning. For example, if she can wait 6 months and take the distribution in 2013 she may save on taxes. That said, no one knows for sure what the tax rates will be in 2013, especially for higher incomes.

If she has to take the distribution right away, the earlier in a year she retires the better to prevent excessive income in a single year.

Permalink Submitted by Tony Pondel on Tue, 2012-03-06 18:23

Alan:

Thanks. Appreciate the help.

Tony