If you add back the 20%, the IRS will refund that amount, but only after you file your tax return for the year and show you're due a refund.
You have many choices concerning your retirement plans and may have questions on what is right for you.
A: You are able to make a direct trustee-to-trustee rollover from your governmental 457 plan to a traditional IRA or eligible retirement plan.
With this direct rollover option, the distribution check is made payable to your IRA custodian or new employer plan trustee, so you'll avoid triggering current income taxes.
Consequently, you'll incur the 10% early withdrawal tax if you make withdrawals before age 59 1/2, unless an exception applies.
For 401(k) and 403(b) plans, the exceptions to the 10% early withdrawal tax include withdrawals you make when you separate from service during the year of your 55th birthday or later, or distributions you take as part of an IRS-defined series of substantially equal periodic payments.
For instance, if you roll over your traditional IRA to a 457 governmental plan, you generally cannot make withdrawals unless you leave your job or retire, reach age 70 1/2, or meet the strict definition of an unforeseeable emergency.
In contrast, you are free to make withdrawals anytime from your IRA, even though you have to pay the federal income taxes owed and any 10% early withdrawal tax.
However, rolling over your traditional IRA or employer retirement plan to your governmental plan doesn't mean these assets are no longer subject to the 10% early withdrawal tax.
Prior to the Economic Growth & Tax Relief Reconciliation Act (EGTRRA), if you wanted to keep your 457 savings growing tax deferred after you left your job, you only had two options: a) leave your plan with your former employer, or b) transfer it to another 457 plan if you want to work for another government employer.
In 2001, EGTRRA was signed into law providing portability provisions for governmental 457 plans (the new portability provisions did not include non-governmental 457 plans).
You can convert your traditional IRA to a Roth IRA if your modified adjusted gross income in the year you convert is less than $100,000.