Author Topic: Can't separate contributions from earnings on Roth 457  (Read 2428 times)

rudimentsofgruel

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Can't separate contributions from earnings on Roth 457
« on: May 30, 2017, 10:51:24 AM »
I have a Roth 457 that I am depending on for cashflow this summer. As per the rules, I am no longer employed at the Agency that provided the plan, and it is more than five years since my first contribution. A 457 should allow me to withdraw my contributions tax-free, but earnings would be taxed as regular income. I just called to make the withdrawal and was told that there is no way to separate earnings from contributions, so therefore I will be taxed on a portion of my withdrawal, which effectively makes this a much less useful source of funds, especially if I plan to have earned income later in the year. I have read extensively on the topic and have never heard about this, and have even called the company with questions about withdrawals and nobody told me anything about not being able to solely withdraw contributions. Is this normal with a 457 or is it just Prudential sucking?

Gin1984

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Re: Can't separate contributions from earnings on Roth 457
« Reply #1 on: May 30, 2017, 11:34:18 AM »
I think it is prudential. 

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DrF

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Re: Can't separate contributions from earnings on Roth 457
« Reply #2 on: May 30, 2017, 11:38:47 AM »
Shouldn't you be able to request all statement history, including deposits, for the account? Easily add up your total contributions with that info.

seattlecyclone

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Re: Can't separate contributions from earnings on Roth 457
« Reply #3 on: May 30, 2017, 02:19:06 PM »
Distributions from Roth 401(k) plans are pro-rated in this manner, it's not something the custodian can control. I would not be surprised to discover that Roth 457 plans operate the same way. However you could consider rolling the account into a Roth IRA. At this point, you would be able to withdraw the contributions first before withdrawing the earnings, which is generally positive. The negative is that early withdrawals of earnings would now be subject to a 10% early withdrawal tax that does not apply to 457 plans.

MDM

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Re: Can't separate contributions from earnings on Roth 457
« Reply #4 on: May 30, 2017, 06:30:23 PM »
However you could consider rolling the account into a Roth IRA. At this point, you would be able to withdraw the contributions first before withdrawing the earnings, which is generally positive.

...provided the OP already has a Roth IRA that has been established for 5 years, correct?

E.g., In the case of rollovers from a Roth 401(k), any years in the Roth 401(k) are not added to the years for the Roth IRA; thus, if the individual did not otherwise have a Roth IRA already, the rollover from a Roth 401(k) begins a new 5-year period, even if the Roth 401(k) itself had already satisfied the 5-year requirement (per Treasury Regulation 1.408A-10, Q&A-4(a)) - and again assuming 457s behave as 401ks.

rudimentsofgruel

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Re: Can't separate contributions from earnings on Roth 457
« Reply #5 on: May 31, 2017, 11:20:46 AM »
Shouldn't you be able to request all statement history, including deposits, for the account? Easily add up your total contributions with that info.

Actually, they are able to tell me exactly how much my contributions are, just claim that they aren't able to separate them when I make a withdrawal. It's a bit frustrating because I have been in conversations with various representatives about this fund over the past couple months and nobody told me this until I went to make the withdrawal. I actually suspect the agent might just be a fool and should have tried to call again for a different one, but I was feeling impatient and went through with it. If I withdraw more in the future, I'll dig a little deeper.

If I don't end up having any income this year, which is unlikely, it won't really matter, but if I do it'll be quite annoying. It's actually not that much money at the moment, but it definitely makes me think a bit more about all the Roth conversions I've been doing over the last couple years of zero income. I guessing Vanguard will be better, but I'll have to check into it.

No, OP does not have a Roth IRA open for five years.

dandarc

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Re: Can't separate contributions from earnings on Roth 457
« Reply #6 on: May 31, 2017, 11:33:56 AM »
Roth 457 is possibly the stupidest retirement account for just this reason.  Which is a shame, because traditional 457 is perhaps the best one for someone looking to FIRE.

The point is, you cannot simply withdraw just the contributions from a Roth 457 before 59.5.  Because that is what the law says.  You don't get ordering rules in a Roth 457 the way you do in a Roth IRA.  Don't like that?  Two options:

As seattle cyclone says, roll the whole thing to Roth IRA, the basis should follow, and you can withdraw contributions at any time from your Roth IRA.  You may want to verify that Roth 457 to Roth IRA rollovers work the same way that Roth 401K to Roth IRA rollovers work, but that's how you do what you want to do.

Option 2 is to lobby congress to change the law regarding Roth 457s.  Good luck with that one.

dandarc

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Re: Can't separate contributions from earnings on Roth 457
« Reply #7 on: May 31, 2017, 11:40:43 AM »
MDM -

For the purposes of withdrawing contributions from a Roth IRA, 5 year rules do not apply.  You can withdraw contributions at any time tax and penalty free.  When you roll Roth 401(K) (I'm guessing Roth 457 too), the basis follows.  Like a get out of jail free card, at least up to your contribution amounts.

Gin1984

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Re: Can't separate contributions from earnings on Roth 457
« Reply #8 on: May 31, 2017, 11:53:45 AM »
Roth 457 is possibly the stupidest retirement account for just this reason.  Which is a shame, because traditional 457 is perhaps the best one for someone looking to FIRE.

The point is, you cannot simply withdraw just the contributions from a Roth 457 before 59.5.  Because that is what the law says. You don't get ordering rules in a Roth 457 the way you do in a Roth IRA.  Don't like that?  Two options:

As seattle cyclone says, roll the whole thing to Roth IRA, the basis should follow, and you can withdraw contributions at any time from your Roth IRA.  You may want to verify that Roth 457 to Roth IRA rollovers work the same way that Roth 401K to Roth IRA rollovers work, but that's how you do what you want to do.

Option 2 is to lobby congress to change the law regarding Roth 457s.  Good luck with that one.
Citation please.  I'd really like that because my employer says something different.

rudimentsofgruel

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Re: Can't separate contributions from earnings on Roth 457
« Reply #9 on: May 31, 2017, 11:57:34 AM »
Roth 457 is possibly the stupidest retirement account for just this reason.  Which is a shame, because traditional 457 is perhaps the best one for someone looking to FIRE.

The point is, you cannot simply withdraw just the contributions from a Roth 457 before 59.5.  Because that is what the law says.  You don't get ordering rules in a Roth 457 the way you do in a Roth IRA.  Don't like that?  Two options:

As seattle cyclone says, roll the whole thing to Roth IRA, the basis should follow, and you can withdraw contributions at any time from your Roth IRA.  You may want to verify that Roth 457 to Roth IRA rollovers work the same way that Roth 401K to Roth IRA rollovers work, but that's how you do what you want to do.

Option 2 is to lobby congress to change the law regarding Roth 457s.  Good luck with that one.

Thanks for the clarification dandarc. Interesting that I hadn't read anything about that before. Next time I'll just look at the law first. It's not a huge amount in this case, but I'll keep it in mind if I have a 457 option in the future.

MDM

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Re: Can't separate contributions from earnings on Roth 457
« Reply #10 on: May 31, 2017, 11:58:19 AM »
MDM -

For the purposes of withdrawing contributions from a Roth IRA, 5 year rules do not apply.  You can withdraw contributions at any time tax and penalty free.  When you roll Roth 401(K) (I'm guessing Roth 457 too), the basis follows.  Like a get out of jail free card, at least up to your contribution amounts.
Yes, that's right - thanks.  Don't know whether I was thinking of a conversion amount or penalty-free earnings withdrawal but a contribution originally made to a Roth account is neither of those....

dandarc

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Re: Can't separate contributions from earnings on Roth 457
« Reply #11 on: May 31, 2017, 12:14:59 PM »
Roth 457 is possibly the stupidest retirement account for just this reason.  Which is a shame, because traditional 457 is perhaps the best one for someone looking to FIRE.

The point is, you cannot simply withdraw just the contributions from a Roth 457 before 59.5.  Because that is what the law says.  You don't get ordering rules in a Roth 457 the way you do in a Roth IRA.  Don't like that?  Two options:

As seattle cyclone says, roll the whole thing to Roth IRA, the basis should follow, and you can withdraw contributions at any time from your Roth IRA.  You may want to verify that Roth 457 to Roth IRA rollovers work the same way that Roth 401K to Roth IRA rollovers work, but that's how you do what you want to do.

Option 2 is to lobby congress to change the law regarding Roth 457s.  Good luck with that one.

Thanks for the clarification dandarc. Interesting that I hadn't read anything about that before. Next time I'll just look at the law first. It's not a huge amount in this case, but I'll keep it in mind if I have a 457 option in the future.
I imagine a lot of folks don't really care as they're not planning on withdrawing before 59.5 anyway.  In Florida, for example, you have FRS as a state employee and a 457.  No 401K.  So a lot of folks who want to put more than what you can put into FRS wind up treating the 457 just like a 401K, and that's a perfectly rational thing to do if you're in this situation and looking at a "normal" retirement.  So for your typical person on a Dave-Ramsey type of plan, Roth 457 vs. Traditional 457 looks an awful lot like any other Roth vs. Traditional decision.  You've got a situation where not many people will know the rules because they don't matter to that may people.

But for someone shooting for early retirement, it actually isn't the same as other Roth vs. Traditional decisions.  We're saying "you mean to tell me that I get an additional $18K of tax-advantaged space AND there's no early withdrawal penalty!  YES!"  But the withdrawal details actually matter for us.

Anyway, Roth 457 just isn't what you think it would be:

457 primary benefit = penalty-free withdrawal after separation.  No 59.5 rules to get around.

Roth primary benefit = pay tax now, no tax on withdrawal.

Roth 457, you'd think would be "pay tax now, no tax on withdrawal, even before 59.5".  But it is not - it is "pay tax now, no tax on withdrawal after 59.5.  But tax on pro-rated earnings if you withdraw before 59.5".  At least there is no 10% penalty on top of the regular tax.

rudimentsofgruel

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Re: Can't separate contributions from earnings on Roth 457
« Reply #12 on: May 31, 2017, 12:20:48 PM »
Roth 457 is possibly the stupidest retirement account for just this reason.  Which is a shame, because traditional 457 is perhaps the best one for someone looking to FIRE.

The point is, you cannot simply withdraw just the contributions from a Roth 457 before 59.5.  Because that is what the law says.  You don't get ordering rules in a Roth 457 the way you do in a Roth IRA.  Don't like that?  Two options:

As seattle cyclone says, roll the whole thing to Roth IRA, the basis should follow, and you can withdraw contributions at any time from your Roth IRA.  You may want to verify that Roth 457 to Roth IRA rollovers work the same way that Roth 401K to Roth IRA rollovers work, but that's how you do what you want to do.

Option 2 is to lobby congress to change the law regarding Roth 457s.  Good luck with that one.

Thanks for the clarification dandarc. Interesting that I hadn't read anything about that before. Next time I'll just look at the law first. It's not a huge amount in this case, but I'll keep it in mind if I have a 457 option in the future.
I imagine a lot of folks don't really care as they're not planning on withdrawing before 59.5 anyway.  In Florida, for example, you have FRS as a state employee and a 457.  No 401K.  So a lot of folks who want to put more than what you can put into FRS wind up treating the 457 just like a 401K, and that's a perfectly rational thing to do if you're in this situation and looking at a "normal" retirement.  So for your typical person on a Dave-Ramsey type of plan, Roth 457 vs. Traditional 457 looks an awful lot like any other Roth vs. Traditional decision.  You've got a situation where not many people will know the rules because they don't matter to that may people.

But for someone shooting for early retirement, it actually isn't the same as other Roth vs. Traditional decisions.  We're saying "you mean to tell me that I get an additional $18K of tax-advantaged space AND there's no early withdrawal penalty!  YES!"  But the withdrawal details actually matter for us.

Anyway, Roth 457 just isn't what you think it would be:

457 primary benefit = penalty-free withdrawal after separation.  No 59.5 rules to get around.

Roth primary benefit = pay tax now, no tax on withdrawal.

Roth 457, you'd think would be "pay tax now, no tax on withdrawal, even before 59.5".  But it is not - it is "pay tax now, no tax on withdrawal after 59.5.  But tax on pro-rated earnings if you withdraw before 59.5".  At least there is no 10% penalty on top of the regular tax.

It's still not that bad a deal if you have no other income and only withdraw up to the standard deduction amount.