At retirement, the calls start. Someone suggests rolling your Deferred Comp into an IRA “for more investment choices.” Sometimes that’s the right move.
But your 457 account has a rule most retirement accounts don’t, and for anyone retiring before 59½, it can be worth a lot.
The 457 advantage
With a 401(k), 403(b) or IRA, withdrawals before 59½ usually bring a 10% additional tax unless an exception applies.
A government 457(b) like the New York State Deferred Compensation Plan is different. Once you leave public service, Plan payments aren’t subject to that 10% tax at any age. You still owe ordinary income tax.
Two exceptions to watch. Money you rolled into the Plan from a 401(k), 403(b) or IRA keeps its original rules and may still face the 10% tax before 59½. And once you roll Deferred Comp money out to an IRA, it’s IRA money: the penalty-free access is gone.
Your choices at retirement
| Choice | How it works | Worth considering when |
|---|---|---|
| Leave it in the Plan | Money stays invested and tax-deferred; you take withdrawals when and how you choose | You’re under 59½, or the Plan’s low-cost funds suit you |
| Take periodic payments | Set amounts monthly, quarterly or yearly from the Plan | You want a steady paycheck alongside your pension |
| Take partial withdrawals | Withdraw what you need, when you need it | Your spending is uneven: a roof, a car, help for a child |
| Roll to an IRA | Move some or all to a traditional or Roth IRA | You’re 59½ or older and want to consolidate or invest differently |
| Roll to another plan | Move to a new employer’s 457, 401(k) or 403(b) | You’re starting another job with a good plan |
You don’t have to decide everything the day you retire. The Plan lets you choose when payouts start, and you can roll money out later. Required minimum distributions don’t begin until 73, or 75 if you were born in 1960 or later.
Retiring before 59½: the bridge
This is where the 457 earns its keep. Say you retire at 56 with a pension, plan to claim Social Security at 67, and want to spend more in your active years.
Deferred Comp can fill that gap with no early-withdrawal penalty. Keeping it in the Plan until you’re past 59½, or keeping enough in it for the bridge years, preserves that option. Rolling it all to an IRA at 56 would not.
Taxes to plan around
- Pre-tax withdrawals are federal taxable income in the year you take them. Large withdrawals can push you into a higher bracket.
- Roth Deferred Comp money can come out tax-free if the account has been open five years and you meet the age or other requirements.
- Once you’re 59½, Deferred Comp withdrawals may qualify for New York’s $20,000 annual pension and annuity exclusion. Confirm your situation with your CPA.
- Lower-income years between retirement and Social Security can be a good time to withdraw at low rates or convert some to Roth.
Before you roll anything out
- Ask what you’d pay in the IRA, all-in, compared with the Plan’s fees and funds.
- Ask whether the person recommending the rollover is paid more if you do it.
- If you’re under 59½, keep enough in the Plan to cover your bridge years.
- Use a direct rollover so no tax is withheld.
- Separate any rolled-in money in your thinking: it doesn’t share the 457 penalty exemption.
How Morrowgate helps. Greg maps when each income source starts: pension, Deferred Comp, Social Security and savings. Then he sets how much to draw from each, so taxes stay level and the years before Social Security are covered. If rolling some of your Deferred Comp makes sense, he’ll say how much and when. If leaving it in the Plan is better, he’ll say that too.
Questions people ask
Is there a penalty for taking Deferred Comp before 59½?
Not after you leave public service. Governmental 457(b) payments aren’t subject to the 10% early-withdrawal tax, except money that was rolled in from another plan type or an IRA.
Do I have to take my money out when I retire?
No. You can leave it in the Plan and start payments later. Required minimum distributions begin at 73, or 75 if you were born in 1960 or later.
Should I roll my Deferred Comp into an IRA?
Sometimes, especially after 59½. Before then, rolling out gives up penalty-free access. Compare costs and your income plan first.
Can I roll it into a Roth IRA?
Pre-tax money can be converted, but the converted amount is taxable that year. It’s a tax decision to plan with your CPA.
Where this guidance stops
This article is general education on the New York State Deferred Compensation Plan: how the rules and the options generally work.
It is not tax, legal or investment advice, and nothing here is a recommendation for your situation. Rules change and outcomes turn on the facts, which is why a CPA and an attorney look at a family’s own numbers before anything is done.
Sources
- New York State Deferred Compensation Plan
- NYSDCP: Roth contributions and distribution rules (PDF)
- NYSDCP: Lifetime of Service brochure (PDF)
- IRS: Exceptions to tax on early distributions
- IRS: Required minimum distributions