Slott Report Mailbag: Can I Roll a Non-Governmental 457(b) Plan to an IRA?

By Joe Cicchinelli, IRA Technical Expert

Follow Me on Twitter: @JoeCiccEdSlott

This week’s Slott Report Mailbag comes to you live from the Arizona Biltmore Resort and Spa and our Fall 2012 Master Elite and Elite IRA Advisor Group Workshop.  We answer questions about rolling before-tax and/or after-tax money to an IRA, non-governmental 457(b) plans and rolling money to an IRA during bankruptcy.  As always, we stress the importance of working with a competent, educated financial advisor to keep your retirement nest egg safe and secure. Find one in your area at this link.

1.

I turned 70 1/2 this year and I am retiring before the end of the year. I understand I need to take my RMD (required minimum distribution) from my 401(k) before I can transfer it to an IRA. I have before-tax and after-tax money in my 401(k). If I move it to an IRA, can the after-tax money be moved to a Roth IRA instead of receiving a check for that amount? Thank you.

Answer:
IRS Notice 2009-68 says that if a direct rollover of only part of your funds is made (and some is paid to you), each distribution includes a pro-rata amount of the after-tax funds. It appears that the only way you could rollover only the pre-tax funds to your IRA and only the after-tax money to your Roth IRA would be to have the entire amount paid to you (i.e., not choose a direct rollover) and use the 60-day rollover rule. You could then fund the IRA first and the Roth IRA last. However, the 20% withholding rules would apply to the pre-tax portion. You would have to be able to make up the withheld amount from other personal funds. Any overpayment of taxes would be refunded to you when you file your tax return. This is a controversial topic and tax advice is needed. Further IRS clarification is needed. Your RMD cannot be rolled over.

2.

Can a non-governmental eligible 457(b) plan be rolled into an IRA? I’ve checked five different sources and three of them say “no” and two of them say “yes” it can.

Who’s right?

Thanks!

Answer:
Only governmental 457(b) plans can be rolled over to an IRA. Non-governmental 457(b) plans cannot be rolled over to an IRA.

3.

Hello,

I am in the middle of a bankruptcy and my attorney told me I could legally put some money into an IRA to protect it. I have done some research and found that you can only deposit $5,000 a year into an IRA. I have more than that to work with. I need some help with this, and I hope you can help.

Answer:
The annual IRA contribution limit is $5,000 (or $6,000 is you are age 50 or older this year). If you roll over employer retirement plan money to an IRA, those rollover funds will be protected in bankruptcy. Other funds cannot be put into an IRA.