If you’re in a 457(b) plan and are nearing retirement, you may want to consider an often-overlooked rule that could allow you to defer twice the usual annual elective deferral limit (for 2025, $23,000 x 2 = $47,000) in the three years before retirement.
This almost-too-good-to-be-true opportunity is sometimes called the “2x catch-up” or the “3-year special catch-up.” It’s available if you are in either of the two types of 457(b) plans: governmental plans for state and local municipal workers, and non-governmental plans for key management and other high-paid employees of tax-exempt employers like hospitals and universities. (The latter plan is often referred to as a “top-hat” plan.)
It should come as no surprise that there are limitations on the 2x catch-up. First, plans do not have to offer it, although most do. Also, this is a true catch-up contribution, since any prior elective deferrals to the 457(b) will offset it. In other words, the only way you can defer exactly twice the deferral limit is if you haven’t previously put away any funds in the plan. Finally, if you’re a municipal worker, you can’t use the 2x catch-up in the same year you also use the age-50-or-older catch-up or the “super catch-up” for ages 60-63. (Note that neither the age-50-or-older catch-up nor the super catch-up is available if you’re in a top-hat plan.)
The 2x catch-up can be done in the 3 calendar years before the employee reaches his “normal retirement age.” That term should be defined in the 457(b) plan document. IRS rules say that the plan can define “normal retirement age” as any age chosen by the employee that is between 65 and 70½. (If you’re in a defined benefit pension plan, an earlier age may be possible.) So, you can normally make the 2x catch-up in the three calendar years before an age you choose that is between 65 and 70½. (In some cases, the plan will designate a uniform normal retirement age in that range without allowing you to choose.)
Starting next year, certain highly-paid employees in municipal 457(b) plans (as well as in 401(k) or 403(b) plans) who want to make catch-up contributions will have to make them as Roth contributions. (If the plan does not offer Roth contributions, these high-paid individuals won’t be able to make any catch-up contributions at all.) Does this rule apply to the 2x catch-up? The IRS says no – except in the highly unusual situation where your age-50-or-older catch-up limit is higher than your 2x catch-up limit. In that case, catch-up contributions up to the 2x catch-up limit don’t have to be made on a Roth basis. Only catch-ups over the 2x limit have to be Roths.
If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.
Specializing in private wealth management, we provide education, guidance, and strategies to help you achieve a tax-efficient retirement income.
Specializing in private wealth management, we provide education, guidance, and strategies to help you achieve a tax-efficient retirement income.
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