457B reinvestment after taking a lump sum

[blperez24]

Recently I had a situation of severance of ties with an employer with a nongovernmental 457B plan.  I took the lump sum and now realize I will have to claim this 162K as income.  It has already been taxed. I live in NYS.  I have a 401K,Sep IRA and 529 plans for my kids.  How do I claim this income on my taxes?  Is it claimed as a 1099?Also where should I invest this money to mitigate further tax burden. I have been advised a whole life policy, however I am not too interested in doing that.

[jfoxcpacfp]

NO WHOLE LIFE, please. I'll stop shouting now.

You will receive a 1099R for the distribution and will report it on page 1 of your form 1040 for 2016. If it has been less than 60 days since you rolled out the 457b, you may be able to roll it into another non-governmental 457b plan if you have access, i.e. are employed at another non-governmental position offering 457b access that allows roll-ins.

Depending upon your plans for the use of the money, you may choose to invest or use for short-term goals. Your primary concern is no longer tax mitigation because you have already taken the full hit and the money is free and clear of any constraints. You can do whatever you want with it with no penalty or interest. If you want to invest it for the long term, I would recommend an appropriately diversified equity mutual fund portfolio, rebalanced annually, and otherwise left alone until you are within 5 years of commencement of draw-down, at which point my advice would change. If you choose to work with a financial planner, please choose a fee-only CFP for your own benefit. If the one you are using now recommended that you purchase whole life insurance, you need to change advisors (or CPAs, as the case may be). Good luck!

[blperez24]

so if the income from a nongovernmental 457B is reported on a 1099R.  Can I divert 20% of it into a Sep IRA

[Zaphod]

You can do whatever you want with it.

[jfoxcpacfp]

blperez24 wrote:

so if the income from a nongovernmental 457B is reported on a 1099R.  Can I divert 20% of it into a Sep IRA

Click to expand...

You can spend it, deposit into a SEP, deposit it into a taxable account - whatever you want. But you won't save any of the taxes you'll owe on the original distribution by contributing it to a SEP. Confusing, I know.

[blperez24]

So no option to lower the taxes owed ?

[jfoxcpacfp]

I gave you the only option I know of - to roll into a nongovernmental 457b at your current job if available and w/i 60 days. Actually, can you roll backward into your prior plan?

[litovskyassetmanagement]

jfoxcpacfp wrote:

blperez24 wrote:

so if the income from a nongovernmental 457B is reported on a 1099R.  Can I divert 20% of it into a Sep IRA

Click to expand…

You can spend it, deposit into a SEP, deposit it into a taxable account – whatever you want. But you won’t save any of the taxes you’ll owe on the original distribution by contributing it to a SEP. Confusing, I know.

Click to expand...

I don't believe you can roll over the 457b non-governmental into any IRA (or place the distribution into any plan other than another non-governmental 457b):

https://www.irahelp.com/forum-post/12064-non-governmental-457b-money-what-are-my-options

So taking the money out and placing it in a SEP IRA is not allowed (deductible or not - SEP does not even allow after-tax or non-deductible contributions in the first place), unless there is an IRS chapter and verse that shows otherwise.

[jfoxcpacfp]

Kon Litovsky wrote:

jfoxcpacfp wrote:

blperez24 wrote:

so if the income from a nongovernmental 457B is reported on a 1099R.  Can I divert 20% of it into a Sep IRA

Click to expand…

You can spend it, deposit into a SEP, deposit it into a taxable account – whatever you want. But you won’t save any of the taxes you’ll owe on the original distribution by contributing it to a SEP. Confusing, I know.

Click to expand…

I don’t believe you can roll over the 457b non-governmental into any IRA (or place the distribution into any plan other than another non-governmental 457b):

https://www.irahelp.com/forum-post/12064-non-governmental-457b-money-what-are-my-options

So taking the money out and placing it in a SEP IRA is not allowed (deductible or not – SEP does not even allow after-tax or non-deductible contributions in the first place), unless there is an IRS chapter and verse that shows otherwise.

Click to expand...

It is not possible to "roll into" any IRA. Once the money is out, it is the same as depositing money from his business checking account into his SEP IRA. There are no longer any strings attached. It is fungible, just like any other taxable account.

[litovskyassetmanagement]

jfoxcpacfp wrote:

Kon Litovsky wrote:

jfoxcpacfp wrote:

blperez24 wrote:

so if the income from a nongovernmental 457B is reported on a 1099R.  Can I divert 20% of it into a Sep IRA

Click to expand…

You can spend it, deposit into a SEP, deposit it into a taxable account – whatever you want. But you won’t save any of the taxes you’ll owe on the original distribution by contributing it to a SEP. Confusing, I know.

Click to expand…

I don’t believe you can roll over the 457b non-governmental into any IRA (or place the distribution into any plan other than another non-governmental 457b):

https://www.irahelp.com/forum-post/12064-non-governmental-457b-money-what-are-my-options

So taking the money out and placing it in a SEP IRA is not allowed (deductible or not – SEP does not even allow after-tax or non-deductible contributions in the first place), unless there is an IRS chapter and verse that shows otherwise.

Click to expand…

It is not possible to “roll into” any IRA. Once the money is out, it is the same as depositing money from his business checking account into his SEP IRA. There are no longer any strings attached. It is fungible, just like any other taxable account.

Click to expand...

Right, but that's not what OP was asking about.  I think he was asking about a rollover and the fact that this distribution is reported as 'income' that can maybe be put into his SEP.  This is actually a distribution, and unless it is rolled over, it is not eligible to be contributed into any non 457b retirement plan, so that's all I wanted to point out for those who might not see the difference.

[jfoxcpacfp]

Kon Litovsky wrote:

jfoxcpacfp wrote:

Kon Litovsky wrote:

jfoxcpacfp wrote:

blperez24 wrote:

so if the income from a nongovernmental 457B is reported on a 1099R.  Can I divert 20% of it into a Sep IRA

Click to expand…

You can spend it, deposit into a SEP, deposit it into a taxable account – whatever you want. But you won’t save any of the taxes you’ll owe on the original distribution by contributing it to a SEP. Confusing, I know.

Click to expand…

I don’t believe you can roll over the 457b non-governmental into any IRA (or place the distribution into any plan other than another non-governmental 457b):

https://www.irahelp.com/forum-post/12064-non-governmental-457b-money-what-are-my-options

So taking the money out and placing it in a SEP IRA is not allowed (deductible or not – SEP does not even allow after-tax or non-deductible contributions in the first place), unless there is an IRS chapter and verse that shows otherwise.

Click to expand…

It is not possible to “roll into” any IRA. Once the money is out, it is the same as depositing money from his business checking account into his SEP IRA. There are no longer any strings attached. It is fungible, just like any other taxable account.

Click to expand…

Right, but that’s not what OP was asking about.  I think he was asking about a rollover and the fact that this distribution is reported as ‘income’ that can maybe be put into his SEP.  This is actually a distribution, and unless it is rolled over, it is not eligible to be contributed into any non 457b retirement plan, so that’s all I wanted to point out for those who might not see the difference.

Click to expand...

Actually, it was unclear exactly what the OP was asking, if you'll go back and read the post. "It has already been taxed." and "How do I claim this income on my taxes?" I agree that there was confusion on the OP's part, but I believe I covered all angles.