Cents and Sensibility
Cents and Sensibility
Question: I have a deferred compensation plan with the state of Hawaii and plan to retire this year. I don't want to leave the money there and feel trapped and locked in. Do I have any options? 457 plan is more
flexible than everAnswer: You certainly do! If you work for a state, county, city or other governmental agency, and you have a 457 government deferred compensation plan, your plan has lacked one key feature found in 401(k)s -- flexibility.
Specifically, when 401(k) investors change jobs, they're generally free to move money into, and out of, their plans. For example, suppose Katy Smith leaves her position at Company X. She could move her 401(k) funds to a rollover IRA, where her money would continue to grow tax deferred. Then, after Katy lands a new job with Company Y, she can move the money from the IRA into her new employer's 401(k). Not all plans accept these rollovers, but many do.
Until recently, your 457 plan didn't give you this valuable rollover option. In 2001 and earlier years, if you left your job, you could defer taxes on your 457 by transferring the money directly to another 457 plan. That was a major disadvantage, particularly if you wanted to move into the private sector.
But now, thanks to the Tax Relief Act of 2001, things have changed. You can roll over the money in your 457 plans to an IRA or another type of retirement plan, such as a 401(k) or a 403(b). This extra flexibility can pay off for you in big ways. First, by rolling over your 457 into an IRA, you can continue tax deferral, which means more of your money can continue working for you. Second, by putting your 457 funds into an IRA, you'll gain a great deal of investment freedom, because you can choose to invest in your IRA with almost any type of financial instrument: stocks, bonds, certificates of deposit, government securities, etc. And lastly, it's nice to know that your 457 funds can move with you when you change jobs.
The new tax laws also give you the chance to contribute more to your 457 plan while you've still got it. In 2001, you could put in a maximum of $8,500 to your 457. But this year, you can contribute up to $11,000; this ceiling rises by $1,000 per year until it reaches $15,000 in 2006, after which the limit will be indexed for inflation. Also, if you are 50 or older, you can make "catch-up" contributions that allow you to top the designated limits. This year, this catch-up amount is $1,000; the amount increases gradually until it hits $5,000 in 2006.
Your 457 plan was already a good way to help you accumulate assets for retirement. And now, thanks to the new tax laws, your 457 offers you greater flexibility, higher contribution limits and the chance to accelerate your savings as you near retirement age.
Guy Steele is a financial planner and head
of the Pali Palms office of Edward Jones. Send
planning and investing questions to him at 970
N. Kalaheo Ave., Suite C-210, Kailua, HI, 96734,
or by email at: gsteele2@pixi.com