By Gregory F. Crump
If you’re a government employee participating in a 457 retirement plan1, you’ll be happy to learn that the new tax provisions greatly expand the “portability” you now have to roll over your retirement assets from one type of account to another. The provisions also significantly increase the amount you can save for your retirement while allowing you to preserve the tax-deferred status of your accumulated assets when you retire or terminate your employment.
Previously, assets held in your employer-sponsored 457 plan could only be rolled over into another 457 plan, leaving you with limited distribution and investment options at retirement. Today, you may select a tax-free transfer between your 457 deferred compensation plan and various tax-deferred retirement plans-as long as the plan accepts such transfers. This new portability means that you can move your assets without paying current income taxes. These transfers may include employer-
sponsored 401(k)s, 403(b)s, pensions, profit sharing, IRAs or other 457 plans.
Another benefit of this increased portability is that you can consolidate all your retirement assets in one account. Fewer accounts make monitoring investment performance simpler and reduce paperwork and fees.
Increased Savings Power
You no longer have to offset your 457 plan contributions by any 401(k) or 403(b) contribution you make. And, you may defer up to $11,000 in 2002 plus an additional $1,000 “catch-up” allowance if you are 50 or older.
This catch-up allowance does not apply if you take advantage of the “three years prior to retirement” rule which, depending on your particular circumstance, may be an even better deal. According to the rule, in the final three years prior to retirement you are afforded a catch-up of twice the normal limit. In other words, you may defer $22,000 in 2002 if you are eligible to use the three-year rule. You should speak with your employer for more details.
Should You Switch Plans?
There may be one compelling reason for you to leave your retirement assets in your former employer’s plan. An unusual provision under Internal Revenue Code Section 457 provides that all pre-59 ∏ distributions are penalty free. This important tax break is lost if your 457 balance is rolled into
another employer’s plan or IRA.
Once you transfer to a new retirement vehicle your assets will be subject to the rules of that plan and any withdrawal taken prior to age 59 ∏ will be subject to an early withdrawal penalty. If you were planning an early retirement, say at age 55, this particular requirement may pose a problem for you. You should consult with your employer for any additional requirements imposed by your particular plan before you make a transfer.
The most important function of your retirement account is to make sure you have assets available to you during your retirement years. Ultimately, you are responsible for your own retirement planning decisions. A conversation with your employer, tax advisor and a Financial Consultant could help you make an informed decision suited to your particular retirement goals.
Salomon Smith Barney does not provide tax or legal advice. Please consult your legal and/or tax professional for such guidance.
Salomon Smith Barney
3101 Spring Arbor Rd., Ste. 400
Jackson, MI 49203