457 Deferred Compensation Plans

Moving beyond the private-sector plans covered so far, 457 plans serve a distinct group: state and local government employees and certain tax-exempt organization employees. These plans have unique features, especially the early withdrawal penalty exemption.

Who Is Eligible for a 457(b) Plan?

• Available to state and local government employees and certain tax-exempt organization employees
• Deferral limit (2026): $24,500 (same as 401(k))
• Age 50+ catch-up: $8,000 (governmental plans only)
• Age 60-63 super catch-up: $11,250 (governmental plans only)

What Is the Special 3-Year Catch-Up?

In the 3 years before normal retirement age, a plan may let participants defer more than the annual limit. The cap is the lesser of:

• Double the annual limit (2026: $49,000, 2 x $24,500), or
• This year's limit plus the part of the limit from earlier years that the participant did not use

Double the limit is a ceiling, not an automatic amount. Unused room from earlier years sets the real cap:

• A participant who deferred the full limit every year has no unused room, so the special catch-up adds nothing
• A participant who deferred nothing in earlier years has enough room to reach the full $49,000
• Cannot combine with age-based catch-ups, including the age 60-63 super catch-up
• If eligible for both, use whichever catch-up provision produces the higher deferral

The special three-year catch-up depends on proximity to the plan's normal retirement age. The super catch-up separately requires turning 60, 61, 62, or 63 during the year. Being in the three-year window alone does not qualify a participant for the super catch-up.

Why Is There No 10% Early Withdrawal Penalty?

This is the defining 457(b) feature:

• Distributions before age 59-1/2 are subject to ordinary income tax but NOT the 10% early withdrawal penalty
• This is unique to 457(b). All other employer plans (401(k), 403(b)) and IRAs impose the 10% penalty on early withdrawals (with limited exceptions)
• One carve-out: the part of a governmental 457(b) distribution that comes from money rolled in from a 401(k), 403(b), other qualified plan or IRA is still subject to the 10% penalty

Exam Tip: Gotchas

• 457(b) plans have NO 10% early withdrawal penalty regardless of age. This is a key distinction from 401(k), 403(b), and IRA plans. The 10% penalty reaches a 457(b) distribution only to the extent it comes from money rolled in from a 401(k), 403(b), other qualified plan or IRA.
• "Up to double" is a ceiling. The special 3-year catch-up is the lesser of double the limit or this year's limit plus unused room from earlier years. A question that says the participant has unused room can key the special catch-up as the larger amount. A question that gives no unused room does not.

How Do Governmental and Tax-Exempt 457(b) Plans Differ?

The sponsoring employer type determines key features:

Key distinction: A tax-exempt organization's 457(b) is an unfunded plan. Assets remain part of the employer's general assets and are subject to the employer's creditors, similar to a non-qualified plan. A governmental 457(b) is held in trust and protected.

Exam Tip: Gotchas

• Tax-exempt 457(b) plans cannot be rolled over and have no creditor protection. Only governmental 457(b) plans are rollover-eligible.

Can a 457(b) Stack With a 401(k) or 403(b)?

A unique feature of 457(b) plans: participants can contribute the maximum deferral to both a 457(b) and a 401(k) or 403(b) in the same year. The 457(b) deferral limit is separate from the 401(k)/403(b) limit.

• Example: A government employee with both a 457(b) and a 401(k) could defer $24,500 to each plan in 2026 = $49,000 total (before catch-ups)

Exam Tip: Gotchas

• 457(b) deferral limits are separate from 401(k)/403(b) limits. If a question describes someone with both plans, they can max out both in the same year.

What Should You Check on Exam Day?

• Confirmed the plan is a 457(b), not a 401(k) or 403(b), before applying the no-penalty rule, which covers governmental and tax-exempt 457(b) plans alike except for money rolled in from another plan type or an IRA.
• Checked whether the plan is governmental (trust-held, rollover-eligible, age-50+ catch-up available) or tax-exempt (unfunded, no rollover, no age-50+ catch-up).
• Distinguished the special 3-year catch-up (the lesser of double the annual limit or this year's limit plus unused room from earlier years, cannot combine with age-50+ catch-up) from the age-based catch-ups.
• Remembered the 457(b) deferral limit is separate from the 401(k)/403(b) limit, so a government employee with both plans can max out both in the same year.