The 457(b) and its separate limit

How it works

A worker defers part of each paycheck before tax, up to this year's official 457b elective deferral limit (not yet verified here; see the official source below) for the year, and that cap is counted on its own, so a person with both a 457(b) and a 403(b) can fill both. The distinctive feature is what happens after leaving the employer: money taken from a governmental 457(b) is taxed as ordinary income but does not carry the 10 percent early withdrawal addition, at any age, because that addition does not apply to this type of plan. Money rolled into a 457(b) from a 401(k) or IRA keeps the penalty rules of where it came from, and the plan tracks it separately. A special catch up in the three years before the plan's normal retirement age may allow extra deferrals, under the conditions the IRS lists. Plans at private nonprofits follow different rules.

What it gives

The cap is separate, so a worker with two plan types can defer into both in the same year.

Withdrawals after separation from a governmental plan carry no 10 percent addition, whatever the person's age.

Deferrals lower taxable income this year and grow without yearly tax.

What it costs, or where the catch is

A 457(b) at a private nonprofit is not held in trust for the worker and can be lost if the employer fails.

Money rolled in from other plan types does not pick up the no penalty treatment.

Fund menus in some government plans are small and the fees vary by vendor.

A worked example

Marcus is a county employee, age 52, who earns $70,000 and has access to both a 457(b) and a 401(k). He defers $9,000 to the 457(b) and $9,000 to the 401(k), which is $18,000 total, and each amount counts against its own cap. He leaves the county at 53 and takes $5,000 from the 457(b). He owes ordinary income tax on the $5,000 but no 10 percent addition, which saves him $500.

Where it goes wrong

The common miss is assuming a nonprofit 457(b) works like a government one, when the nonprofit version is an unsecured promise rather than money held in a trust.

Who confirms it for you

For your own numbers, the plan administrator or HR. This page explains how the rule works for people in general; it does not know your situation and does not tell you what to do.

The official source

IRS: 457(b) deferred compensation plans. Every figure that changes by year comes from the site's rules table, which the watcher checks against the official page on a schedule; where a figure is not yet verified, this page says so instead of printing a number.