Virginia Retirement System members ask one question before leaving state or local government service: can I move my VRS account into a self-directed IRA that holds physical gold? The answer depends entirely on which VRS plan you are in and which type of distribution you are taking. This guide maps each VRS plan against IRS rollover rules so you know exactly what moves and what stays behind.
Which VRS Assets Can Be Rolled to a Gold IRA
Hybrid Plan members can roll the full defined contribution component (401(a) and 457(b) balances) to a traditional gold IRA upon separation from VRS-covered employment. Plan 1 and Plan 2 members can roll a refund of their own member contributions before retirement. The VRS defined benefit monthly annuity cannot be rolled to any IRA because it pays as a recurring pension, not an account balance. Virginia taxes IRA distributions, but residents age 65 and older may qualify for a deduction of up to $12,000 per person under Virginia Code Section 58.1-322.02. Consult your tax advisor for your specific situation.
VRS Plan Overview: Plan 1, Plan 2, and Hybrid
The Virginia Retirement System administers three distinct plan structures for state and local government employees. Which plan you are in determines what assets you have available to roll over and which IRS distribution rules apply to your situation.
- Hired before July 1, 2010, or vested before that date
- Pure defined benefit: monthly lifetime annuity at retirement
- Member contributes 5% of creditable compensation
- Employer contributions fund the pension; not in a member account
- Rollable asset: refund of member contributions only (before retirement)
- Hired on or after July 1, 2010, through December 31, 2013
- Pure defined benefit: monthly lifetime annuity at retirement
- Member contributes 5% of creditable compensation
- Employer contributions fund the pension; not in a member account
- Rollable asset: refund of member contributions only (before retirement)
- Default for hires on or after January 1, 2014
- Smaller DB component plus an individual DC account
- DC includes a 401(a) plan and a 457(b) plan
- Rollable assets: the full DC account balance upon separation
- Highest rollover potential of the three plans
Verify your plan membership through your myVRS account at varetire.org. Some employees who were in Plan 1 or Plan 2 before January 1, 2014 had the option to transfer into the Hybrid Plan during an election window; others who moved between employers may have changed plans. Confirm your current plan before taking any distribution action.
Hybrid Plan DC Component: The Primary Rollover Source
For members in the VRS Hybrid Retirement Plan, the defined contribution component is where the rollover opportunity lives. The Hybrid DC account holds two types of contributions in separate plan vehicles: a 401(a) plan and a 457(b) plan. Both are eligible rollover distributions under IRC Section 402(c) upon separation from VRS-covered employment.
401(a) Plan Component
The 401(a) plan within the Hybrid DC receives mandatory contributions from both the member and VRS. Members contribute a mandatory percentage of their salary; VRS contributes to the member’s DC account as well. These contributions accumulate in the member’s individual account and are invested in the VRS DC fund options. At separation, the vested 401(a) balance is an eligible rollover distribution. You can direct it via direct rollover into a traditional self-directed IRA that holds IRS-approved precious metals.
Employer matching contributions to the 401(a) component are subject to a vesting schedule published by VRS. If you leave before satisfying the vesting period, you forfeit unvested employer contributions. Your own mandatory contributions are always fully vested. Verify your vesting status through myVRS before separating.
457(b) Plan Component
The 457(b) plan within the Hybrid DC accepts optional voluntary contributions above the mandatory 401(a) amount. Members may contribute additional salary deferrals to the 457(b), and VRS may provide matching contributions on those voluntary deferrals as well, subject to the same vesting schedule. The 457(b) balance is also an eligible rollover distribution upon separation.
The 457(b) carries a significant tax advantage that does not exist for the 401(a): distributions from a governmental 457(b) plan are not subject to the 10 percent early distribution penalty under IRC Section 72(t), regardless of your age. The next section explains this advantage in detail and why rolling the 457(b) into an IRA changes the rules.
Rollover Table: Hybrid DC Component
| Asset | Rollover-Eligible? | Notes |
|---|---|---|
| 401(a) member mandatory contributions | ✓ Yes | Eligible rollover distribution upon separation; always 100% vested |
| 401(a) employer contributions (vested) | ✓ Yes | Only vested portion is eligible; unvested is forfeited |
| 401(a) employer contributions (unvested) | ✕ No | Forfeited upon separation before vesting period is met |
| 457(b) member voluntary contributions | ✓ Yes | Eligible rollover; no early distribution penalty while in the 457(b) |
| 457(b) employer matching (vested) | ✓ Yes | Eligible rollover upon vesting; vesting schedule applies |
| Hybrid DB component (pension annuity) | ✕ No | Pays as a monthly annuity; not an account balance; cannot be rolled |
The 457(b) Early Distribution Advantage (and the Trap)
The governmental 457(b) plan has a tax characteristic that sets it apart from virtually every other retirement plan: the 10 percent early distribution penalty does not apply. Under IRS rules, distributions from a governmental 457(b) are not subject to the additional tax under IRC Section 72(t), regardless of the participant’s age. A 50-year-old who separates from VRS and takes a distribution directly from the 457(b) plan pays ordinary income tax but no 10 percent penalty.
This creates a real advantage for members who may need access to retirement funds before age 59 and a half. However, the advantage disappears the moment the 457(b) balance moves to a traditional IRA.
Once a governmental 457(b) balance is rolled into a traditional IRA, it loses its penalty-free status. The funds become ordinary IRA assets subject to the 10 percent early distribution penalty for withdrawals before age 59 and a half (unless another exception applies under IRC Section 72(t)). If you are under age 59 and a half and think you may need access to these funds in the next few years, consult your tax advisor before rolling the 457(b) balance into an IRA. For members who do not need early access, the rollover eliminates the annual plan fees at VRS and consolidates retirement assets.
The decision to roll the 457(b) balance into a gold IRA should weigh the benefit of physical precious metals exposure against the loss of penalty-free access. For more context on how governmental 457(b) plans interact with self-directed IRA rules, see our companion guide: 457(b) to Gold IRA Rollover for Government Employees.
Plan 1 and Plan 2 Member Contribution Refund
Plan 1 and Plan 2 members do not have an individual DC account like Hybrid members. Their retirement assets are entirely in the defined benefit structure, which means the only amount available for rollover before retirement is a refund of their own member contributions.
Plan 1 and Plan 2 members contribute 5% of their creditable compensation to VRS during their careers. If a member leaves VRS-covered employment before retirement, they may apply for a refund of those contributions. The refund amount equals the member’s own contributions plus accrued interest. Employer contributions and the state’s funding share are not returned.
The refund is an eligible rollover distribution under IRC Section 402(c). Members can direct the refund via direct rollover to a traditional IRA, including a self-directed IRA holding IRS-approved gold and precious metals. The rollover preserves the pretax character of the contributions and avoids immediate income taxation.
Taking a member contribution refund forfeits the defined benefit pension rights for the service years covered by those contributions. If you have 20 years of service credit and take a refund, you lose the right to a VRS pension based on those 20 years. If you later return to VRS-covered employment, you may be able to purchase restored service credit, but the cost is typically higher than what you originally contributed. Model the lifetime value of the lost pension against the current refund amount before deciding. This analysis should involve a licensed financial advisor and your tax advisor.
Applying for the Plan 1/Plan 2 Refund
Members who have separated from VRS-covered employment (not retired) may request a refund through their myVRS account or by contacting VRS directly at varetire.org. The refund form asks you to specify the payment method: a direct cash payment (subject to 20% mandatory federal withholding) or a direct rollover to a qualifying IRA or plan. Always choose the direct rollover option to preserve the full pretax balance and avoid the withholding problem described in the rollover steps section below.
What Is NOT Rollable from VRS
Understanding what cannot be rolled over prevents costly mistakes. The following VRS assets are not eligible for rollover to any IRA:
| Asset | Why Not Rollable |
|---|---|
| VRS defined benefit monthly annuity (Plans 1, 2, or Hybrid DB) | Pays as a recurring periodic benefit, not an account balance. No lump sum is available to roll over once retirement has started. |
| Unvested employer contributions (Hybrid DC) | Forfeited upon separation before the vesting period is met. These funds never enter the member’s account. |
| Active VRS account while still employed | IRS rules prohibit in-service rollovers of active plan balances before age 59 and a half for most qualified plans. Confirm your plan’s in-service distribution rules with VRS. |
| Plan 1/Plan 2 employer contributions to the pension fund | Employer contributions fund the pension pool. They are not held in individual member accounts and cannot be refunded or rolled over. |
Virginia Income Tax on IRA Distributions
Virginia taxes IRA distributions as ordinary income under the Virginia income tax. Virginia’s individual income tax rates are graduated, reaching the top rate of 5.75% on taxable income above $17,000 per Virginia Code Section 58.1-320. A VRS rollover that is properly executed as a direct rollover from VRS to a traditional IRA is not a taxable distribution: it defers both federal and Virginia income tax until money is actually withdrawn from the IRA.
When you eventually take IRA distributions in retirement, Virginia will tax them at your marginal rate in effect at the time of withdrawal. Virginia does not provide a blanket exemption for IRA income the way some states do for public pension income. However, Virginia provides a meaningful deduction for older residents.
Virginia Age Deduction for Retirement Income
Under Virginia Code Section 58.1-322.02, Virginia taxpayers age 65 and older may deduct up to $12,000 per person from taxable retirement income, which includes IRA distributions. The deduction phases out for taxpayers with income above $50,000 for single filers and $75,000 for joint filers. At higher income levels, the deduction is reduced proportionally until it phases out entirely.
| Filing Status | Full $12,000 Deduction | Phase-Out Begins | Phase-Out Complete |
|---|---|---|---|
| Single | Income at or below $50,000 | Income above $50,000 | Higher income levels |
| Married Filing Jointly (each spouse 65+) | Income at or below $75,000 | Income above $75,000 | Higher income levels |
Virginia also has no estate tax, which simplifies the planning picture for IRA assets that pass to heirs. Virginia abolished its estate tax effective July 1, 2007. For the broader Virginia retirement tax picture, see our companion guide: Gold IRA for Virginia Residents.
Step-by-Step VRS Rollover Process
The mechanics of moving VRS assets into a self-directed gold IRA follow a standard sequence. Executing each step in order avoids the mandatory withholding trap and keeps the transfer tax-deferred.
Confirm your VRS plan and eligible assets
Log into myVRS at varetire.org. Confirm which plan you are in (Plan 1, Plan 2, or Hybrid), your current account balances for the DC component if applicable, your vesting status for any employer match, and whether you are separated from VRS-covered employment. Rollovers require separation; active employees generally cannot roll active VRS balances into an IRA.
Open a self-directed gold IRA with an IRS-approved custodian
A gold IRA requires a custodian that specifically handles self-directed accounts holding physical precious metals under IRC Section 408(m)(3). The custodian must be IRS-approved. Open the IRA account and obtain the custodian’s account number and rollover instructions before contacting VRS. Many custodians can complete account opening within a few business days.
Request a direct rollover from VRS
Contact VRS through myVRS or by phone to request a direct rollover (also called a trustee-to-trustee transfer). Specify the receiving IRA custodian’s name, account number, and mailing instructions. Under a direct rollover, VRS sends the funds directly to the custodian rather than to you. This avoids the mandatory 20% federal income tax withholding under IRC Section 3405(c) that applies when VRS makes the payment directly to the member.
Avoid the 60-day indirect rollover trap
If VRS pays the distribution directly to you rather than to the custodian, federal rules require VRS to withhold 20% for taxes. You receive only 80% of the distribution but must deposit 100% of the original amount into the IRA within 60 days to complete a full tax-free rollover. The missing 20% must come from your own funds, or it is treated as a taxable distribution and may be subject to early distribution penalties. Use the direct rollover method to avoid this entirely.
Select IRS-approved precious metals for the IRA
Once the rollover funds arrive at the custodian, direct the custodian to purchase IRS-eligible precious metals. Under IRC Section 408(m)(3), gold held in an IRA must meet a minimum purity of 0.995 (99.5% fine). American Eagle gold coins are an exception explicitly permitted by statute. The metals must be held at an IRS-approved depository, not at home. The custodian coordinates the depository relationship. Consult your tax advisor for your specific situation.
Critical Pitfalls: Rule of 55 and the 457(b) Conversion Trap
Two tax rules create traps that are easy to overlook when rolling VRS assets into a gold IRA. Both relate to early access to funds before age 59 and a half.
Under IRC Section 72(t)(2)(A)(v), members who separate from VRS-covered service in or after the calendar year they turn age 55 can take distributions from the Hybrid 401(a) plan without the 10% penalty. This protection applies only while the funds remain in the 401(a) plan. A direct rollover into a traditional IRA eliminates the Rule of 55 protection. If you roll the 401(a) to an IRA and then need income before age 59 and a half, the distributions are subject to the 10% penalty. Members between ages 55 and 59 and a half who may need near-term income should model whether leaving the 401(a) in-plan makes more sense than rolling it to the IRA.
As described above, the governmental 457(b) has no early distribution penalty while the balance stays in the 457(b) plan. Roll it into a traditional IRA and it becomes subject to the 10% penalty for distributions before age 59 and a half. For members under age 55 who want maximum flexibility for early income access, the 457(b) penalty exemption is worth preserving by keeping the balance in-plan rather than rolling to an IRA. If you do not anticipate needing the funds before 59 and a half, the rollover to a gold IRA is generally straightforward.
Who Is NOT a Good Fit for a VRS-to-Gold-IRA Rollover
A gold IRA is not right for every VRS member with rollable assets. The following profiles describe situations where the rollover may not serve the member’s interests.
| Situation | Why This Creates a Problem |
|---|---|
| Still actively employed in VRS-covered position | In-service rollovers of active plan balances are generally not permitted before age 59 and a half. Verify your plan’s terms before attempting any distribution. |
| Under age 59 and a half, needs income access within 5 years | Rolling the 457(b) eliminates its penalty-free access. Rolling the 401(a) eliminates the Rule of 55 protection. Both create a 10% penalty exposure if you need the funds early. |
| Close to normal VRS retirement eligibility (Plan 1/Plan 2) | Taking the member contribution refund permanently forfeits pension rights. The lifetime income value of a VRS pension often exceeds what a refund amount can generate in an IRA. Get a pension income projection from VRS before deciding. |
| Small DC account balance | Gold IRA custodians charge annual fees (account maintenance, depository storage, insurance). On small balances, fees may erode a disproportionate share of the account value each year. Verify the custodian’s fee schedule and compare against account size. |
| Needs liquidity within 1 to 2 years | Physical gold in an IRA cannot be liquidated instantly. Selling requires coordinating a sale through the custodian and depository, which takes time. IRA early withdrawals of physical metals are treated as distributions and taxed accordingly. Gold IRAs are long-term retirement vehicles. |
If none of these situations applies to you, and you have separated from VRS employment with rollable DC assets or a refund of contributions, the process is straightforward. For members who want to understand how a specialist manages precious metals IRA accounts before committing, Augusta Precious Metals offers a no-cost educational consultation with a salaried, non-commissioned advisor who can walk you through the account structure, eligible metals, and ongoing costs without pressure. Request Augusta’s free IRA education guide.
Frequently Asked Questions
Can I roll my VRS pension into a gold IRA?
The VRS defined benefit pension annuity cannot be rolled into an IRA because it pays out as a recurring monthly benefit, not an account balance. However, certain VRS distributions are eligible rollover distributions under IRC Section 402(c). Hybrid Plan members can roll the defined contribution component (both 401(a) and 457(b) balances) to a gold IRA upon separation from VRS-covered employment. Plan 1 and Plan 2 members can roll a refund of their member contributions if they leave before retirement. Consult your tax advisor for your specific situation.
What is the VRS Hybrid Retirement Plan DC component?
The Hybrid Retirement Plan is the default plan for Virginia state and local government employees hired on or after January 1, 2014. It combines a reduced defined benefit component with a defined contribution component. The DC component includes a 401(a) plan funded by mandatory member and employer contributions, and a 457(b) plan that accepts optional voluntary member contributions. The 401(a) and 457(b) balances are managed through participant accounts and are eligible for rollover to a traditional IRA when the member separates from service. VRS administers the DC plans through a third-party recordkeeper. See varetire.org for current plan details.
Is the VRS 457(b) subject to the 10 percent early withdrawal penalty?
No. Distributions from a governmental 457(b) plan are not subject to the 10 percent early distribution penalty under IRC Section 72(t), regardless of the member’s age at the time of distribution. However, this advantage applies only while the funds remain in the 457(b) plan. Once rolled into a traditional IRA, the 457(b) assets are governed by IRA distribution rules, and the 10 percent penalty applies to distributions before age 59 and a half. Consult your tax advisor for your specific situation.
What happens to my VRS pension if I take the refund of member contributions?
Taking a refund of member contributions permanently cancels the service credit associated with those contributions. Employer contributions remain in the VRS fund and are not returned. If you later return to VRS-covered employment, you may be able to purchase previously refunded service credit through a redeposit, but the cost is typically higher than what you originally contributed. The defined benefit pension rights linked to the refunded years are forfeited upon taking the refund. A member considering the refund should compare the long-term value of the lost pension income against the current lump sum before deciding. Consult a licensed financial advisor and your tax advisor before making this decision.
Does Virginia withhold state income tax on a VRS rollover distribution?
A direct rollover from VRS to a traditional IRA avoids both federal and state income tax withholding. If you take the distribution as a cash payment instead, VRS must withhold 20 percent for federal income tax under IRS rules, and Virginia income tax withholding applies under Virginia Code Section 58.1-471. Virginia taxes IRA distributions as ordinary income at rates from 2 percent to 5.75 percent. Residents age 65 and older may deduct up to $12,000 per person from taxable retirement income, subject to income limits under Virginia Code Section 58.1-322.02. Consult your tax advisor for your specific situation.
What is the Rule of 55 and how does it apply to VRS Hybrid 401(a) distributions?
Under IRC Section 72(t)(2)(A)(v), distributions from a qualified plan such as a 401(a) are exempt from the 10 percent early withdrawal penalty if the participant separates from service in or after the calendar year they turn age 55. VRS Hybrid members who leave VRS-covered employment at age 55 or older can take 401(a) distributions penalty-free under this rule. Once rolled into a traditional IRA, the Rule of 55 no longer applies and the 10 percent penalty applies to distributions before age 59 and a half. Consult your tax advisor before rolling over if you may need access to these funds before age 59 and a half.
Can I roll a VRS Hybrid 457(b) balance into a gold IRA?
Yes. A governmental 457(b) plan balance is an eligible rollover distribution under IRC Section 402(c). Upon separation from VRS-covered employment, you can request a direct rollover of the 457(b) balance to a traditional self-directed IRA that holds IRS-approved precious metals. The direct rollover avoids the 20 percent mandatory withholding. Once in the IRA, the 457(b) assets are subject to IRA rules and lose the governmental 457(b) early distribution penalty exemption. Consult your tax advisor for your specific situation.
How do I request a VRS refund of member contributions as a Plan 1 or Plan 2 member?
Plan 1 and Plan 2 members who have separated from VRS-covered employment without taking retirement may apply for a refund of member contributions through their myVRS account at varetire.org or by contacting VRS directly. The refund form asks you to specify the payment method: a direct cash payment (subject to mandatory 20 percent federal withholding) or a direct rollover to a qualifying IRA or retirement plan. Choosing direct rollover avoids withholding and allows the full balance to move to the IRA. Consult your tax advisor for your specific situation.
Who is NOT a good fit for rolling VRS assets into a gold IRA?
VRS members who are still actively employed cannot roll active plan balances into an IRA. Hybrid Plan members under age 59 and a half who may need income access in the near term should consider whether rolling the 457(b) balance eliminates the governmental 457(b) penalty exemption they would otherwise benefit from. Members with small account balances may find that gold IRA custodian and depository fees consume a disproportionate share of the account. Plan 1 or Plan 2 members close to retirement eligibility should model the lifetime value of the VRS pension they would forfeit by taking the member contribution refund. Consult a licensed financial advisor and your tax advisor before proceeding.
Are VRS Hybrid employer matching contributions vested immediately?
VRS Hybrid Plan employer matching contributions to the DC component are subject to a vesting schedule. Members must meet the vesting requirement to retain employer contributions if they leave VRS-covered employment before satisfying the vesting period. Member mandatory contributions are always 100 percent vested immediately. If you leave before the employer match is vested, you forfeit the unvested employer contributions; only your own contributions and the earnings on those contributions are eligible for rollover. Verify your vesting status through your myVRS account at varetire.org before separating.
Sources
- Virginia Retirement System. “Hybrid Retirement Plan Member Handbook.” varetire.org. Accessed July 2026.
- Virginia Retirement System. “Plan 1 and Plan 2 Member Handbooks.” varetire.org. Accessed July 2026.
- Internal Revenue Service. “Eligible Rollover Distributions.” IRS.gov. https://www.irs.gov/retirement-plans/eligible-rollover-distributions
- Internal Revenue Service. “IRC Section 402(c): Rollover Distributions.” IRS.gov.
- Internal Revenue Service. “Retirement Plans FAQs regarding 457(b) Plans.” IRS.gov. https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-457b-plans
- Internal Revenue Service. “IRC Section 72(t): Exceptions to Tax on Early Distributions.” IRS.gov. https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-exceptions-to-tax-on-early-distributions
- Internal Revenue Service. “IRC Section 408(m)(3): Precious Metals IRA Rules.” IRS Publication 590-B. https://www.irs.gov/publications/p590b
- Virginia Code Section 58.1-320. “Virginia Individual Income Tax Rates.” law.lis.virginia.gov. https://law.lis.virginia.gov/vacode/title58.1/chapter3/section58.1-320/
- Virginia Code Section 58.1-322.02. “Subtractions from Virginia Taxable Income.” law.lis.virginia.gov. https://law.lis.virginia.gov/vacode/title58.1/chapter3/section58.1-322.02/
- Virginia Code Section 58.1-471. “Income Tax Withholding.” law.lis.virginia.gov.
- FINRA. “Self-Directed IRAs and the Risk of Fraud.” FINRA Investor Alert. https://www.finra.org/investors/insights/self-directed-iras-and-risk-fraud
- SEC Office of Investor Education. “Investor Bulletin: Self-Directed IRAs.” investor.gov. https://www.investor.gov/introduction-investing/investing-basics/investment-products/iras/self-directed-iras