03/11/2010

We had a great question yesterday from a client who is a firefighter and has two 457 plans in place. These are plans that are similar to 401ks but are in the governmental and non profit sector. In our client’s case, one plan is with a former employer. The other plan is with his current employer. His question: could he convert the 457 money into a Roth IRA [see blog entry on January 4 for more detail on IRA conversions to Roths]

The answer: yes and no, maybe. You have just got to love tax law. My knee jerk reaction was to say that the 457 from the former employer could probably be rolled into a Roth, but not the funds with the current employer.

After some research, I determined that there is confusion out there around this question. It seems clear that you can roll 401k or 457 funds into a traditional IRA and then convert to a Roth IRA IF the funds are in a plan of a former employer. I could not find anything definitive (ie on IRS web site) that verified that you could roll 401k or 457 funds directly into a Roth, although there were commentaries here and there that said you could. I would advise that you ask whoever you are investing with — ie Fidelity or Schwab or Wells Fargo etc.

It gets dicier with funds held in a current employer’s plan. If the plan permits “in-service distributions,” then you may be able to roll the funds into a Roth. But if there is no “in-service distribution” allowance, you are probably stuck.

If anyone out there has more information, feel free to chime in.