Next Wave Options
Independent life insurance and retirement income agency serving Salinas and Monterey County.
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Independent life insurance and retirement income agency serving Salinas and Monterey County.
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A 457(b) deferred compensation plan is the account that County of Monterey, city and other government employees contribute to alongside their CalPERS pension. It works like a 401(k) in most respects, with one difference that matters enormously at retirement: money that originated in a governmental 457(b) is generally not subject to the additional 10 percent tax on early distributions, at any age. Roll that money into an IRA and it becomes IRA money, with the IRA's rules, including that tax before 59½. This page explains the options, that trade-off, and the taxes, neutrally.
Next Wave Options is an independent, insurance-licensed agency in Salinas. We are not affiliated with the County of Monterey, any city, or CalPERS, and we never suggest leaving a public plan.
The IRS describes both on its 457(b) deferred compensation plans page. A governmental 457(b), the kind the county and cities sponsor, holds its assets in trust for participants and can be rolled over to an IRA or another eligible plan. A non-governmental 457(b), offered by some nonprofits to highly paid employees, remains an asset of the employer, cannot be rolled into an IRA, and is exposed to the employer's creditors; its distribution rules are set by the plan. Everything below assumes the governmental kind; if yours is non-governmental, the options are narrower and the plan document is the authority.
| Option | What you keep | What changes |
|---|---|---|
| Leave it in the 457(b) | Tax deferral, the plan's investments and fees, and penalty-free access at any age to money that originated in the plan | No new contributions; the plan's distribution rules apply |
| Transfer it to a new employer's governmental 457(b) | The same 457(b) treatment, in one account | The new plan's menu and rules |
| Transfer it to a 401(k) or 403(b), if accepted | Tax deferral and plan protections | The money takes on that plan's rules, including the additional 10 percent tax before 59½ (with that plan's exceptions); plans must account for 457(b) money separately |
| Roll it into an IRA | Tax deferral when done as a direct rollover; wider product choice | The money becomes IRA money: the additional 10 percent tax applies before 59½ unless an IRA exception applies, creditor protection follows state law, and the once-per-12-months rule governs later 60-day rollovers |
| Take distributions or cash out | Access without the additional 10 percent tax on 457(b)-sourced money | Ordinary income tax on every dollar; a large lump sum can push you into a higher bracket |
The practical rule for someone retiring from county service before 59½: think carefully before rolling a 457(b) into an IRA. Leaving it in the plan, or taking distributions from the plan directly, preserves access without the additional tax. Rolling it out is not wrong, but it should be a decision, not a default.
Distributions from a pre-tax 457(b) are ordinary income in the year taken. A direct rollover to a traditional IRA or another eligible plan is not taxed at the time; it is tax-deferred, not tax-free, and the tax is due on withdrawal. Required minimum distributions apply at the IRS age, with a working exception for the plan of a current employer under some plans' rules. Some governmental 457(b) plans offer a Roth option; Roth 457(b) money follows Roth rules and can roll to a Roth IRA. Any of these details for your situation belongs with a tax professional; we will tell you when you have reached that point.
County employees contribute to the Monterey County Deferred Compensation Plan, whose plan documents and distribution forms are the authority on what the plan allows. City employees have their own plans. All of them sit alongside a CalPERS pension, which pays a monthly benefit for life under CalPERS's own rules and elections and generally cannot be rolled over. The useful retirement question is how the pension, Social Security and the 457(b) together cover essential expenses for life, which is the income planning worksheet. Where an annuity comes into that conversation, it comes with its limits: surrender charges for a period of years, withdrawal limits, and caps on indexed contracts; and because 457(b) money already has penalty-free access, moving it into an annuity inside an IRA gives up something real in exchange for lifetime income, a trade that has to be stated plainly before it is made. Our County of Monterey 457(b) page goes deeper.
Related: 401(k) rollover options for the general mechanics, IRA rollover for what happens after money reaches an IRA, and public employees for the pension side.
Yes, if it is a governmental 457(b), as a direct rollover, and it stays tax-deferred. Once in an IRA the money follows IRA rules, including the additional 10 percent tax on withdrawals before 59½ unless an exception applies, which 457(b) money did not have.
Generally not on money that originated in a governmental 457(b); it is taxed as ordinary income but not subject to the additional 10 percent tax. Money rolled into the 457(b) from other plan types may keep those plans' rules.
It is one of the options and often a reasonable one, especially if you retire before 59½ and want access without the additional tax. Compare the plan's fees and distribution options with the alternatives before deciding; there is no deadline forcing a rollover.
Generally no. A CalPERS defined-benefit pension pays a monthly benefit for life under CalPERS's own rules and elections. Only the 457(b) account you contributed to has rollover options.
Through an IRA, yes, and it stays tax-deferred. Doing so trades the 457(b)'s penalty-free access for lifetime income under a contract with surrender charges, withdrawal limits and, for indexed contracts, caps. It can fit part of a balance for essential expenses; it is rarely right for the whole account.
No. We are an independent insurance agency. We explain the options and link to the official plan and CalPERS documents, and we never suggest leaving a public plan.
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Schedule a CallReviewed by Roberto Morales, California Insurance License #0G97165. Next Wave Options is licensed for life and annuity products only and does not provide investment, tax or legal advice.
