Any earnings on the contributions you make to a supplemental plan grow tax deferred. The taxable income you'll pay upon withdrawing funds depends on the type of contributions you make to the plan. If you make pretax contributions, withdrawals are fully taxable as ordinary income. If you make after-tax Roth contributions to a governmental 457(b) plan, the contributions are always tax free when you begin to withdraw from the plan. However, in order to receive the Roth earnings tax-free you must meet the five year seasoning period and incur a separation from service, attain age 70½ (subject to plan rules) or are deceased. The payment of Roth governmental 457(b) accumulations will be on a pro-rata basis including both contributions and earnings as required by the Internal Revenue Code.
For either type of contribution, the 10% early withdrawal penalty on withdrawals before age 59½ does not apply to distributions from governmental 457(b) plans.
The tax information contained herein is not intended to be used, and cannot be used by any taxpayer for the purpose of avoiding tax penalties that may be imposed on the taxpayer. It was written to support the promotion of the products and services addressed herein. Taxpayers should seek advice based on their own particular circumstances from an independent tax advisor.