Section 457 Deferred Compensation Plans
Moving beyond the private-sector plans covered so far, Section 457 plans serve a distinct group: state and local government employees and certain tax-exempt organization employees. These plans have unique features that the exam loves to test, especially the early withdrawal penalty exemption.
Eligible 457(b) Plans
- 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)
Special 3-Year Catch-Up
In the 3 years before normal retirement age, participants may defer up to double the annual limit:
- 2026: up to $49,000 (2 x $24,500)
- Cannot combine with the age 50+ catch-up; participants must choose one or the other
- Can use whichever catch-up provision produces the higher deferral
No 10% Early Withdrawal Penalty
This is the single most important 457(b) feature for the exam:
- 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)
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. Exam questions often test whether the 10% penalty applies to 457 distributions. It does not.
Governmental vs. Tax-Exempt 457(b)
The sponsoring employer type determines key features:
| Feature | Governmental 457(b) | Tax-Exempt 457(b) |
|---|---|---|
| Rollover eligible | Yes (to IRA, 401(k), 403(b)) | No |
| Held in trust | Yes | No (unfunded, general assets) |
| Age 50+ catch-up | Yes | No |
| Creditor protection | Yes | No |
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.
Dual Plan Participation
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.