Adding Cryptocurrency to Your Retirement Savings With a 457 Rollover
With a Deutsche Bank analyst going so far as to predict that cryptocurrency would replace fiat currencies by 2030, cryptocurrency cannot be ignored by anyone in modern-day society.
While the notion of completely replacing fiat money is still somewhat radical, what’s less shocking is the idea of diversifying your retirement savings using cryptocurrency.
Adding cryptocurrency to your retirement fund will reduce your exposure to any of the assets that you currently hold. It might empower your savings with some protection against inflation. And it has tremendous long-term growth potential.
One way to take advantage of these benefits is to use the funds from your 457 plan to purchase cryptocurrency. After we review what your 457 plan entails, we’ll walk you through the steps involved to roll over your funds into the type of account that will let you hold crypto or other approved assets—a self-directed IRA (SDIRA).
What is a 457 plan?
A 457 plan is nonqualified, tax-advantaged deferred-compensation retirement plan that is available for state and local government employers and certain tax-exempt organizations.
For government 457 plans, state or local law determines eligibility. For 457 plans sponsored by tax-exempt organizations, only highly compensated employees and select management may participate.
Under a 457 plan, employees defer income tax on retirement savings into future years.
Though a form of a deferred compensation plan existed for state and local government employers prior to 1978, the Revenue Act of that year officially established 457 plans. 401(k) plans began around the same time for private employers; some government employers used them as well, until further legislation clarified the intent behind the different plans.
The Tax Reform Act of 1986 prohibited the establishment of new 401(k)s for state and local government employers, which helped in reinforcing the 457 as the primary retirement vehicle for state and local government employers. Those government employers with established 401(k) plans were allowed to continue them until they terminated them at a later date. The Economic Growth and Tax Relief Reconciliation Act of 2001 brought 457 plans into closer alignment with other retirement plans with such measures as increasing the contributions that could be made.
While 457 are exempt from rules of the Employee Retirement Income Security Act (ERISA), those rules are often consulted when employers are establishing policies, procedures, and best practices in administering the plans.
Benefits of a 457 plan
If you are employed by the government or a non-profit and are offered a 457 plan, you’ll find that there are several attractive features to this plan.
But as you consider these benefits, remember that choosing a retirement plan now doesn’t mean you’re stuck with it forever. Down the road, you might want to reallocate some or all of your retirement savings into other account types, particularly if you want to diversify your holdings beyond the traditional options of mutual funds, stocks, and bonds.
In fact, you might find that you can enjoy the benefits of choosing a plan—like the 457—now, but then later reallocate your retirement savings so that you can pick up the perks of other account types. This lets you add those other accounts’ benefits to your retirement savings, as is often seen with account types like self-directed IRAs.
The key benefits of a 457 plan include:
- It’s offered. A retirement plan is better than no retirement plan. If your employer offers one, you’ll probably want to take it over nothing, even if it come with limitations. Because 457 plans are offered by specific employer types, you may encounter this as your option if you want your employer to help you save for retirement.
- You can reduce taxable income. Through a participation agreement with your employer, you determine the amount of your 457 contributions up to IRS-defined limits. You can make pre-tax contributions, reducing your taxable income. If your employer is a government agency, you may also be allowed to contribute on a Roth after-tax basis.
- Your earnings grow tax deferred. Your 457 account’s earnings are reinvested and grow tax deferred. If your 457 is sponsored by a government agency, your money is only taxed when it is withdrawn. However, withdrawals from a Roth 457 plan are subject to special rules. If your 457 is sponsored by a tax-exempt organization, withdrawals are taxed when they are paid out or made available.
- You can take your 457 with you. You may be able to roll your 457 account into another employer’s eligible retirement plan, Traditional IRA, or Roth IRA, if your 457 is sponsored by a government agency. You also can leave your money in your plan or cash out. If you choose the cash out option, you will be subject to income tax.
- You can make catch-up contributions. If you are at least 50 years of age and you have a government-sponsored 457 plan, you may make an annual catch-up contribution up to $6,500 as of 2020. However, if you have a 457 plan sponsored by a tax-exempt organization, you can’t make catch-up contributions.
- There is no early withdrawal penalty. Withdrawals from your 457 account are not subject to the 10 percent early distribution penalty. And you can make regular withdrawals from your 457 as soon as you retire, regardless of whether you have reached age 59 and a half or not.
Rules of a 457 plan
When evaluating whether to choose a 457 plan, there are certain rules you should consider. The IRS has also published a handy chart that explains the rules for 457 plans sponsored by governments and those sponsored by tax-exempt organization, including how they are similar and how they differ.
We’ve highlighted some of the key rules below:
- Contribution limits – For a government-sponsored 457, the limit on annual contributions from your salary is $19,000 in 2019 and $19,500 in 2020. A catch-up contribution for people 50 years old or older is allowed up to $6,000 in 2019 and $6,500 in 2020.
- Catch-up contributions – A special catch-up contribution for a government-sponsored 457 allows you for three years prior to the normal retirement age specified in the plan to contribute the lesser of twice the annual limit of $39,000 in 2020 and $38,000 in 2019 or the basic annual limit plus the amount of the basic limit not used in prior years.
- Roth designations – In addition, a government-sponsored 457 plan can be changed to allow Roth contributions and in-plan rollovers to a designated Roth account.
- Matching contributions – In addition, employer-matched contributions count toward the maximum contribution limit, although many government employers do not offer matching contributions.
Should I consider adding cryptocurrency to my retirement portfolio?
Cryptocurrencies have a number of characteristics that make them an attractive option to include in your retirement portfolio.
- Diversify your savings – Popular wisdom notes that by placing various assets in your portfolio, you will likely be less susceptible to any volatility or problems faced by any single asset over time.
- Long-term growth potential – Mark Yusko, chief executive and chief investment officer at Morgan Creek Capital Management, forecasts that Bitcoin could reach a value of $100,000 by 2021 and $250,000 by 2025.
- Decentralized infrastructure – This trait makes it impossible for governments or banks to directly interfere with your crypto’s value, and also means that your cryptocurrency is isolated from the trends of conventional fiat currency.
- Anti-inflation – Many cryptocurrencies are limited in supply and inflation-resistant. For example, there is a hard limit of 21 million Bitcoin that can be created.
- High-security – A blockchain network is used to confirm and secure transactions, and cryptocurrencies are stored privately in encrypted software wallets. Cryptocurrency ownership and transactions data is secured behind several encryption levels, and third parties cannot intervene in transactions.
- Leverage tax-deferred status while still buying crypto – If you’ve been interested in buying crypto, allocating a portion of your retirement savings to it allows you to still enjoy tax-deferred status on your holdings—including any gains.
How do I purchase crypto with a 457?
To purchase cryptocurrency, you need to set up a self-directed IRA, or SDIRA. This account type is recognized by the IRS and allows you to add assets beyond the most conventional options of mutual funds, stocks, and bonds into your retirement savings.
Can I roll over my 457 plan into a cryptocurrency IRA?
If it’s eligible, you can roll over your government-sponsored 457 plan into a self-directed IRA. The self-directed IRA then has its own classification, including Traditional, Roth, Simplified Employee Pension (SEP), and Savings Incentive Match Plan for Employees (SIMPLE) IRAs.
Just as with a 401(k), you cannot move the funds over from your 457 plan if you are still working for the same employer with whom you set this account up and under 59.5 years old. Additionally, unlike most 401(k)s, sometimes even if you are over 59.5 years of age and working for the same employer, your 457 will still be ineligible to rollover. This is because the eligibility rules for a rollover can vary according to the specific plan an individual holds, and so they are often most effectively reviewed on a case-by-case basis. Our Specialists can help start you on this process.
We always recommend you discuss your particular situation with a tax professional, who can review your accounts and give you personalized advice directly.
Opening your SDIRA with BitIRA
If you’re considering rolling over retirement savings into an SDIRA, you’ll be happy to know it takes only six easy steps. The rollover process is generally straightforward:
- Download your free info guide.
- Reach out to BitIRA so we can pair you with a Digital Currency Specialist who will answer your questions.
- Identify any accounts you’d like to roll over into your self-directed IRA, which may include an existing 457 plan if it qualifies. Your Specialist can review this with you and walk you through your options.
- Pick the type of self-directed IRA you would like to open.
- Choose and purchase your cryptocurrency.
- Monitor your Digital IRA’s performance in BitIRA’s Customer Web Portal, My BitIRA. From there, you can also initiate transactions to buy, sell, or swap cryptocurrency within your SDIRA.
We help make the process of diversifying your retirement savings easy, with simple steps to roll over some of your existing savings into an SDIRA. Each person’s situation is different and so our trained Specialists are on-hand to answer your questions. Call us today at (800) 299-1567.