457 roth rollovers
I am a police officer, retiring at 48 years old. I have five hundred thousand in my traditional 457 plan, and one hundred thousand in my Roth 457 (all contributions and growth, no rollovers). I started putting into the Roth in 2018. I would like to start making annual in-plan rollovers to my roth 457 to take advantage of current tax rates. I have two questions.
1) Starting in January of 2022, I will be able to make withdrawals from my Roth (the current hundred thousand in the account) without an early withdrawal penalty even though I’m retiring before 50, correct? I have read IRS publication 575 and can’t find that info specific to 457 plans.
2) If I make a rollover of one hundred thousand this year and then again next year, I have to wait five years to take any of the first rollover money without penalty, and then another year for the second rollover, etc., correct? Assuming that is correct, how do I know how much of the money in the account is my current contributions & growth vs. my rollover & growth? In other words if I have a rolling five year waiting period to withdraw my rollover amounts, my original contributed amount will continue to grow. It seems it would quickly become pretty hard to tell how much I can withdraw without being penalized. Am I missing something or overcomplicating this?
Permalink Submitted by Alan - IRA critic on Fri, 2021-04-16 22:10
Yes, because a 457 is not a qualified plan, it has no early distribution penalty at any age. Note that in Pub 575 it states that the penalty applies to qualified plans, then lists the types of qualified plans. A 457 is not one of them except if you had rolled non 457 money into the 457. That said, a non Roth 457 distribution must include a pro rated amount of earnings in the contribution, and the earnings portion of your distribution will be taxable.
As above, an in plan Roth rollover (IRR), will come from your pre tax 457 portion of the plan. Be sure your plan allows IRRs, as some do not. But if the IRR is allowed, the 5 year holding period for the IRRs will not apply for the same reason as above, ie a 457b has no early distribution penalty. The 457b administrator must provide plan accounting for deferrals, rollovers, IRRs etc and must calculate the taxable amount for all distributions on the 1099R. If you want to know the effect of a distribution before you request it, you will have to depend on plan statements, or if the plan statements are poor quality by calling the plan administrator.
In other words, you should never have to pay a 10% early distribution penalty, which includes holding an IRR for 5 years. However, you will have portions of any distributions attributed to your earnings gains and that portion will be subject to ordinary income tax. If your statement shows you the gains in the account including gains on your IRRs, you should be able to determine what % the gains are of the total balance.
Your plan may be able to help you decipher the plan statements if they are unclear.
Once you reach 59.5, you will probably want to do a direct rollover to a Roth IRA of the Roth portion, and may wish to start a Roth IRA while you still have earned income to get the Roth IRA 5 year clock started.