Are 457 Contributions Tax Deductible or Deferred?

457 contributions are not tax deductible in the traditional sense, but pre-tax deferrals into a 457(b) plan still lower your taxable income for the year. The money comes out of your paycheck before federal income tax is calculated, so your W-2 already reflects the reduction. There’s nothing to claim on your return. For 2026, you can defer up to $24,500, with larger amounts allowed if you qualify for a catch-up.¹

Why It’s a Deferral, Not a Deduction

When you sign up to contribute to a 457(b), your employer withholds the money before running federal income tax withholding. Earn $80,000 and defer $24,500, and the Box 1 wages on your W-2 read $55,500. You never see those dollars as taxable income in the first place, so there’s no deduction to claim. The tax code backs this up directly: compensation deferred under an eligible 457(b) plan is included in gross income only in the year it’s actually paid or made available to you.²

The practical difference from a traditional IRA deduction matters. IRA deductibility can phase out based on your income and whether you’re covered by a workplace plan. A 457(b) deferral has no such gate. Every dollar you defer is excluded from current taxable income no matter what you earn or whether you itemize.

One thing the deferral does not cut: Social Security and Medicare taxes. Your 457(b) contributions are still counted as FICA wages, the same as pre-tax deferrals into a 401(k) or 403(b).³ Employer contributions follow a separate FICA timing rule under IRC 3121(v)(2), generally taxed for FICA at the later of when you perform the services or when the amounts vest.⁴

How Much You Can Defer in 2026

The standard deferral limit for 2026 is $24,500, matching the 401(k) and 403(b) ceilings.¹ Your deferral can’t exceed 100% of your includible compensation.⁵

Governmental 457(b) participants get access to catch-ups on top of that:

If you’re 50 or older, an extra $8,000, for a combined $32,500.¹
If you turn 60, 61, 62, or 63 during 2026, a higher catch-up of $11,250 under SECURE 2.0 replaces the $8,000, raising the combined limit to $35,750.⁶
In the three years before your plan’s normal retirement age, a pre-retirement catch-up can double the limit to $49,000, capped at the standard limit plus your unused deferral room from prior years. Maxing out every prior year leaves nothing to catch up on.²

The pre-retirement catch-up and an age-based catch-up can’t be combined in the same year. The plan uses whichever gives you the higher limit.⁵

Roth 457(b) Contributions Get No Current Tax Break

Many governmental 457(b) plans allow Roth deferrals. Roth money is withheld after income tax, so it does not lower your taxable wages in the year you contribute. In exchange, qualified withdrawals in retirement, including all the investment growth, come out federal-income-tax-free.² A distribution qualifies if the Roth account has been open at least five tax years and you’ve reached 59½ or become disabled.

Roth and pre-tax deferrals share the same annual cap. Defer $15,000 as Roth and $9,500 pre-tax and you’ve used your full $24,500 for 2026. Starting in 2026, SECURE 2.0 requires that catch-up contributions from employees who earned more than $145,000 in FICA wages the prior year be made as Roth. That rule reaches governmental 457(b) plans along with 401(k)s and 403(b)s.

What You Owe When You Take the Money Out

Pre-tax 457(b) withdrawals are taxed as ordinary income in the year received. Original deferrals and investment earnings alike are taxable at your regular federal and state rates.² Roth withdrawals that meet the qualified distribution rules owe nothing.

Governmental 457(b) plans allow distributions on separation from service, at age 70½, in an unforeseeable emergency, or, in many plans, at 59½ while still employed.⁷

No 10% Early Withdrawal Penalty on Governmental 457(b) Money

Governmental 457(b) distributions escape the 10% early withdrawal penalty that hits most other retirement account withdrawals before age 59½.⁸ Leave your government job at 45 and pull money from your 457(b), and you owe income tax but no penalty.

The exemption has limits. Money you rolled into the 457(b) from a 401(k), 403(b), or IRA keeps its original character, and the 10% penalty still applies to those rolled-in dollars if withdrawn before 59½.⁹ The plan tracks those balances separately.

The reverse move is worse. Roll a 457(b) balance into an IRA and those funds fall under IRA distribution rules, so anything you take out before 59½ triggers the 10% penalty.⁸ The penalty-free access is a feature worth keeping.

Non-Governmental 457(b) Plans: The Tax Break Comes With Risk

Everything above assumes a governmental 457(b), sponsored by a state or local government. Tax-exempt employers such as hospitals, charities, and private universities can offer 457(b) plans too, but under materially different rules.⁷

In a non-governmental 457(b), the assets remain the property of the employer and are reachable by the employer’s general creditors in a bankruptcy or lawsuit.¹⁰ If the sponsoring nonprofit fails, you could lose the deferred balance. Other limits also apply: no rollovers to other retirement accounts, no Roth option, no age-based catch-ups (only the pre-retirement catch-up), no participant loans, and taxation triggered when amounts become “made available” to you, not just when actually distributed.⁷

The current-year tax break on the deferral is real either way. In a non-governmental plan, weigh it against the creditor exposure and the reduced flexibility on the back end.

1
Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500
2
Office of the Law Revision Counsel. 26 US Code 457 – Deferred Compensation Plans of State and Local Governments and Tax-Exempt Organizations
3
Internal Revenue Service. Are Retirement Plan Contributions Subject to Withholding for FICA, Medicare, or Federal Income Tax
4
Internal Revenue Service. Employer Contributions to 457(b) Plans
5
Internal Revenue Service. Retirement Topics – 457(b) Contribution Limits
6
Internal Revenue Service. Notice 2025-67 – 2026 Amounts Relating to Retirement Plans and IRAs
7
Internal Revenue Service. Comparison of Tax-Exempt 457(b) Plans and Governmental 457(b) Plans
8
Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
9
Office of the Law Revision Counsel. 26 US Code 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
10
Internal Revenue Service. Non-Governmental 457(b) Deferred Compensation Plans