Governmental 457(b) in 2026: No 10% Penalty, Catch-Ups, Rollovers

The 2026 numbers, and what they add up to

The base figures are from IRS Notice 2025-67. The ceilings in the last column are our arithmetic.

Source: IRS Notice 2025-67, “2026 Amounts Relating to Retirement Plans and IRAs, as Adjusted for Changes in Cost-of-Living”; 26 U.S.C. 457(b) and 414(v). The notice does not give the special catch-up as a figure; $49,000 is twice $24,500 under 457(b)(3)(A).

Two points that explainers often blur. First, the 457(b) dollar limit is its own limit: the IRS says it “is not combined with your deferrals made to a 403(b) or other plans.” That makes a governmental 457(b) the one place where a public employee with a 403(b) can defer a second full amount. Second, 457(b)(2) caps deferrals at the lesser of the dollar amount or 100 percent of includible compensation, so the limit only matters to someone who is paid more than $24,500 and can afford to defer it.

The special catch-up, and why “double” is the wrong word

The special catch-up is in 457(b)(3). A plan “may provide that, for 1 or more of the participant’s last 3 taxable years ending before he attains normal retirement age under the plan”, the ceiling is the lesser of twice the dollar amount, or the plan ceiling for the year plus “so much of the plan ceiling … for taxable years before the taxable year as has not previously been used”. The IRS adds that it is “limited to unused deferral limits from previous years”, and that a participant who deferred the maximum every year he or she was eligible has nothing to catch up. It is a catch-up, not a second allowance.

Normal retirement age is set by the plan, not by the participant, within limits. Under 26 CFR 1.457-4(c)(3), a plan may use any age on or after the earlier of 65 or the age at which participants can retire with an immediate unreduced benefit, “not later than age 70 1/2”; for qualified police or firefighters it may be earlier, but “in no event” earlier than age 40.

Source: our arithmetic from 26 U.S.C. 457(b)(3), 414(v)(6)(C) and 457(e)(18), 26 CFR 1.457-4(c) and the 2026 amounts in Notice 2025-67. The unused-room figures and ages are assumptions; the plan document decides whether it offers the special catch-up, its normal retirement age and how unused room is counted.

The “higher of” rule is the IRS’s own wording: for a governmental 457(b) the section 457(b)(3) catch-up “can’t be combined with age 50 catch-up contributions in any year, so eligible participants are limited to contributing the higher of their age 50 catch-up increase or their IRC Section 457(b)(3) catch up increase.” Whether a given plan offers either is in its plan document.

Combining a 457(b) with a 403(b) or 401(k)

Section 414(v)(2)(D) treats the 401(a), 403(b) and 408(k) or (p) plans of an employer as a single plan for the age catch-up, and treats the 457 plans of that employer as a single plan of their own. Our reading is that a participant aged 62 who is in a 403(b) and in a 457(b) of the same employer could defer $35,750 into each, $71,500 in all, if both plans allow the catch-ups; the $72,000 section 415(c) limit applies to the 403(b) side and does not count catch-up. We have not read a Treasury or IRS example that adds it up this way, so treat the $71,500 as a ceiling to check with the plan, not a promise.

The Roth catch-up rule reaches the 457(b)

Section 414(v)(6)(A)(iii) lists a governmental 457(b) among the “applicable employer plans”, so 414(v)(7) applies: for an eligible participant whose wages “for the preceding calendar year from the employer sponsoring the plan exceed $145,000”, the additional elective deferrals are allowed only “if any additional elective deferrals are designated Roth contributions”. Notice 2025-67 sets the 2026 threshold at $150,000 and says it is used “to determine whether an individual’s catch-up contributions … for 2026 must be designated as Roth contributions.”

For a well-paid public employee aged 50 or over, that means the $8,000 or $11,250 catch-up goes in after tax, if the plan offers a Roth option (414(v)(7)(B) conditions the catch-up on the plan having one). Section 457(e)(18) counts, in the age 50 computation, the lesser of the participant’s designated Roth contributions or the catch-up amount. We did not read Treasury’s final regulations on how wages are measured or when they apply to a particular plan, so check both with your plan administrator; and note that the special 457(b)(3) catch-up is not in the 414(v) wage test in the statute we read (our reading).

Why there is no 10% tax, and the one exception

Section 72(t)(1) adds 10 percent of the includible part of an early distribution only if the taxpayer “receives any amount from a qualified retirement plan (as defined in section 4974(c))”. Section 4974(c) lists a 401(a) trust, a 403(a) annuity plan, a 403(b) contract, and IRAs under 408(a) and 408(b). A 457(b) is not on the list. The IRS page on exceptions to the early distribution tax, last reviewed December 11, 2025, says the tax “generally applies to early distributions from qualified plans, 403(a) or (b) annuity plans and traditional IRAs” and that distributions from a governmental 457(b) plan “are not subject to the 10% additional tax except for distributions attributable to rollovers from another type of plan or IRA.”

Source: 26 U.S.C. 72(t) and 4974(c); IRS, “Retirement topics - Exceptions to tax on early distributions” (page reviewed December 11, 2025). The IRS sentence on rolled-in amounts does not say how a plan allocates a withdrawal between rolled-in and other money; that allocation is a plan and tax professional question.

What the exemption does not do: it does not make the withdrawal tax free. Pre-tax money is ordinary income when paid. What it removes is the extra 10% for someone who leaves public service at 45, 50 or 54 and needs the money before 59½.

When the money can come out

Section 457(d)(1)(A) limits when a plan may make amounts available. For a plan maintained by a state or local government: from age 59½; at severance from employment with the employer; at an unforeseeable emergency; and, in some plans, in the 90 days before a lifetime income investment leaves the menu. A tax-exempt employer’s 457(b) uses 70½ instead of 59½.

An unforeseeable emergency is narrow. The IRS says hardship distributions are “only permitted when a participant is faced with an unforeseeable emergency” and the amount can’t exceed what is reasonably necessary. 26 CFR 1.457-6(c) gives examples, including “the imminent foreclosure of or eviction from the participant’s or beneficiary’s primary residence”, medical expenses and funeral expenses. Buying a house, paying tuition or covering a missed deal in a real estate fund do not appear among the examples we read.

Rolling in and rolling out

Source: 26 U.S.C. 402(c)(8) and (10) and 457(e)(16); Publication 590-B (2025), Form 1099-R code G, “Direct rollover of a distribution to a qualified plan, a section 403(b) plan, a governmental section 457(b) plan, or an IRA.” Rows marked “our reading” are not stated in one IRS sentence.

The worked trap (our arithmetic, assumed facts, pre-tax money, age 52 and separated from the employer):

Source: our arithmetic from 26 U.S.C. 72(t)(1) and the IRS exceptions page. Case D assumes the whole rolled-in bucket is withdrawn; how a plan orders withdrawals between rolled-in and other money is in the plan document.

The practical reading: a person who may need money between a departure from public service and 59½ has a reason to keep the 457(b) as a 457(b) and to think twice before moving an IRA or 401(k) into it. A person who has no such need, who wants a wider investment menu, or who wants to consolidate has reasons to roll it out, and pays for that in the loss of the exemption on the rolled amount (our reading). Neither is advice; the numbers are what the documents say.

457(b), 403(b) and 401(k) side by side

Source: IRS Notice 2025-67; 26 U.S.C. 457, 414(v) and 72(t); IRS pages reviewed December 11, 2025 and February 26, 2026.

For the other columns see our 401(k) and IRA contribution limits page, our Roth catch-up page, our rule of 55 page and our 401(k) rollover page. If you are planning a series of payments before 59½ out of an IRA instead, our 72(t) SEPP page shows what that costs, and our Form 1099-R code page shows what the plan will report.

The decision before you move or defer

• If you are in your last 3 years before the plan’s normal retirement age: ask the plan in writing whether it offers the special catch-up, what its normal retirement age is, and how it counts your unused room. Inside one 457(b), it is the only way to go above $35,750 for 2026.
• If you are leaving public service before 55: the 457(b) is the one account where money can come out without the 10%, if it stays a 457(b) and was not filled by rollovers. A rollover to an IRA ends that for the rolled amount.
• If your prior-year wages from the employer are above $150,000: the catch-up must be Roth in 2026, if the plan has a Roth option.
• If your 457(b) investments are limited to the plan menu: the plan, not the Code, decides whether rental, fund or note income can sit inside it. We have not read any plan document.

What a reader can do with this

• Get three answers in writing from the plan: does it offer the special 457 catch-up, the age catch-up and a Roth option; what is its normal retirement age; and does it allow in-service payments from 59½.
• Check what is in the account. If part of it came from a rollover of a 401(k) or IRA, ask the plan how it is tracked, because that part keeps the 10%.
• Do the rollover arithmetic first. The case table above shows $0 versus $10,000 on a $100,000 withdrawal at 52 (our arithmetic) before any state tax.
• Add the rest of the picture. Pension income, rental income and fund income stack on top of 457(b) withdrawals; our rule of 55 page and contribution limits page show the other accounts.

FAQ

Sources, read and saved on October 28, 2026: IRS Notice 2025-67 (2026 amounts); 26 U.S.C. 457, 414, 402, 72 and 4974 (Cornell Legal Information Institute); 26 CFR 1.457-4 and 1.457-6; IRS, “Retirement topics - Exceptions to tax on early distributions” (reviewed December 11, 2025); IRS, “457 plan trends and tips” and “How much salary can you defer if you’re eligible for more than one retirement plan” (reviewed February 26, 2026); IRS Publication 590-B (2025). The ceilings, the combined $71,500 and the worked examples are our arithmetic; the unused-room amounts and ages in them are assumptions. This is analysis of public documents, not investment, legal or tax advice.