403(b), 457(b) and TSP accounts: how rollovers differ

Not everyone's workplace retirement account is a 401(k). Teachers and hospital employees often have a 403(b). State and local government workers may have a 457(b). Federal employees and service members have the Thrift Savings Plan (TSP). When a job ends, these accounts can usually be rolled over in much the same way as a 401(k), but each has a few features that change the picture, and the non-governmental 457(b) follows quite different rules.

The basics of rollovers, including direct versus indirect rollovers and tax withholding, are covered in how a 401(k) rollover works. This post covers only what is different.

What these plans have in common with a 401(k)

The IRS rollover chart shows which accounts can be rolled into which. Pre-tax money in a qualified plan such as a 401(k), a 403(b) plan or a governmental 457(b) plan can generally be rolled to a traditional IRA or to another one of these plan types, if the receiving plan accepts it. Rolling pre-tax money to a Roth IRA is also permitted but the amount must be included in income.

The choices after leaving a job are therefore broadly the same four described in the guide to old 401(k) options.

403(b) plans

The SEC's investor education site describes a 403(b) plan as a tax-deferred retirement savings program for employees of public schools, certain non-profits and some members of the clergy. For rollover purposes it works much like a 401(k). The basic annual limit on employee deferrals is generally the same as for a 401(k).

The practical differences tend to be about what the account is invested in. Some 403(b) accounts are held in annuity contracts issued by insurance companies rather than in mutual funds. An annuity contract may have its own terms for moving money out, which can include surrender charges during an initial period. Before a rollover from a 403(b), it is worth asking the provider:

• Is the account an annuity contract or a custodial account holding mutual funds?
• Are there surrender charges or other costs to transfer, and when do they end?
• Does the employer's plan allow a rollover of the full balance at separation?

Governmental 457(b) plans

A governmental 457(b) plan is sponsored by a state or local government. The IRS comparison chart confirms that these plans permit rollovers to other eligible retirement plans, including 401(k)s, 403(b)s, other governmental 457(b)s and IRAs.

The feature that sets them apart involves early withdrawals. Distributions from most retirement plans before age 59½ are generally subject to a 10% additional tax. IRS Topic no. 558 explains that an eligible state or local government 457 plan is generally not treated as a qualified retirement plan for this purpose, and distributions from it are not subject to the 10% additional tax. Regular income tax still applies.

There is a catch in each direction:

• Money rolled into a governmental 457(b) from a 401(k), 403(b) or IRA keeps its old character. Topic no. 558 says distributions attributable to those rolled-in amounts are subject to the additional tax. The rollover chart notes that a governmental 457(b) receiving such rollovers must keep them in separate accounts.
• Money rolled out of a governmental 457(b) into an IRA becomes IRA money, and IRA distributions before 59½ are subject to the IRA rules on the additional tax.

This is one reason some people leave 457(b) money where it is rather than combining it with other accounts. The post on early withdrawal exceptions covers the additional tax more fully.

Non-governmental 457(b) plans

A 457(b) plan sponsored by a tax-exempt organization that is not a government, such as a private non-profit hospital or charity, is a different kind of arrangement. The IRS describes non-governmental 457(b) plans as very different from qualified plans and from governmental 457(b) plans. Key points from the IRS:

• No rollovers. The comparison chart answers "No" to whether a tax-exempt 457(b) permits rollovers to other eligible retirement plans such as 401(k)s, 403(b)s, governmental 457(b)s and IRAs.
• Unfunded. Plan assets are not held in trust for employees. They remain the property of the employer and are available to its general creditors in the event of litigation or bankruptcy.
• Taxed when paid or made available. Amounts are includible in income in the year they are paid or made available to the participant.

Because these balances cannot be rolled to an IRA, what happens at separation depends on the plan's own distribution terms, which the plan document sets out.

The Thrift Savings Plan

The TSP is the federal government's retirement savings plan for civilian employees and members of the uniformed services. It shares the 401(k) deferral limit.

Leaving the money in place. According to TSP.gov, a participant can keep the TSP account after separating from federal service as long as the vested balance is $200 or more. Separated participants cannot make new employee contributions but can still change investments and move eligible money in.

Rolling money in. The TSP accepts incoming rollovers, and TSP.gov notes that this option remains available even after a person has retired. The TSP's page on moving money into the TSP says it accepts direct and indirect rollovers of tax-deferred money from traditional IRAs, SIMPLE IRAs and eligible employer plans such as a 401(k) or 403(b). For Roth money, it accepts only direct rollovers from Roth 401(k), Roth 403(b) and Roth 457(b) accounts. It does not accept rollovers from Roth IRAs.

Rolling money out. Separated participants can take partial or total distributions, and eligible distributions can generally be rolled to an IRA or another eligible plan. One detail from TSP.gov is worth knowing: after a total distribution, the account balance is zero and the person can no longer move money into the TSP.

Questions to ask before moving any of these accounts

• For a 457(b), is the employer a government or a non-governmental tax-exempt organization?
• What does the current plan cost, and what would the destination cost? See what 401(k) fees cost.
• Would any plan-specific feature, such as the 457(b) treatment of early distributions, be lost by moving?