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Retirement Pension Rollover Into 457

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I am a 55 year old member of the Texas Municipal Retirement system and would have to pay 10% penalty for a partial lump sum distribution unless I roll it over to qualified plan. I also have a governmental 457. Can I roll the partial lump sum distribution over into the 457 and cash in my 457 right away and avoid the 10% penalty?

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Guest Sierra

I am a 55 year old member of the Texas Municipal Retirement system and would have to pay 10% penalty for a partial lump sum distribution unless I roll it over to qualified plan. I also have a governmental 457. Can I roll the partial lump sum distribution over into the 457 and cash in my 457 right away and avoid the 10% penalty?

 

 

The answer hinges on your employment status which you did not divulge.

 

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If you truly are subject to the 10% penalty, rolling it over to a 457(b) does not recharacterize the money in such a manner that the 10% penalty rules are no longer applicable to those funds. Ok, that's a double negative, so here's a better way of saying that: The 10% excise tax rules will still apply to the amounts rolled into the 457(b) plan.

 

As you seem to be aware, withdrawals from a 457(b) plan are not subject to the 10% early withdrawal penalties (excise tax rules under section 72). However, this exception only applies to the contributions (and earnings) that are attributed to the 457(b) plan, not to any rollovers that go into the 457(b) plan, unless such rollovers were directly rolled in from another 457(b) plan (and such amounts rolled only include 457(b) plan contributions and earnings).

 

Sierra's response is asking whether or not you have separated from employment with this employer (and when). If you left employment in the year you reached age 55 AND the lump sum you mention is from that employer that you left, AND the lump sum is paid after you left, then there is an exception to the section 72 10% excise tax, see exception number 01 on page 3 of the Form 5329 instructions.

 

http://www.irs.gov/pub/irs-pdf/i5329.pdf

 

As you can see, the 10% penalty can be avoided for other reasons as well, and all of these reasons are handled by attaching a Form 5329 to your Form 1040. I'm no CPA, so take this advice to your CPA if you're not sure about this.

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