Inherited 457(b) Plan Rules: Governmental vs. Non-Governmental, Rollover to IRA, and Distribution Options

Government employees, hospital physicians, and nonprofit executives are among the most common holders of 457(b) deferred compensation plans. If you've inherited one, the rules diverge sharply depending on whether the plan was a governmental or non-governmental 457(b) — a distinction that determines whether you can roll the funds to an inherited IRA, how creditor-protected the assets are, and how distributions must be taken.

What is a 457(b) plan?

Section 457(b) of the Internal Revenue Code authorizes "eligible deferred compensation plans" for two distinct employer categories:

• Governmental 457(b) plans — sponsored by state and local governments, including counties, cities, school districts, public universities, and transit authorities. Assets are held in trust exclusively for the benefit of participants and beneficiaries. The largest administrator is MissionSquare (formerly ICMA-RC); others include Nationwide, Voya, and state-specific programs.
• Non-governmental (tax-exempt) 457(b) plans — sponsored by tax-exempt organizations under IRC § 501(c)(3): private hospitals, health systems, university foundations, charities, and religious organizations. Assets are not held in a separate trust — they remain general assets of the employer, subject to employer creditor claims. Participants essentially hold an unsecured promise from their employer to pay in the future.

Both types allow employees to defer salary, and both grow tax-deferred. The 2026 elective deferral limit is $24,500 for both types, with an age-50 catch-up of $8,000 and an ages-60–63 super catch-up of $11,250 under SECURE 2.0.¹ Governmental 457(b) plans also offer a special "last three years" catch-up, potentially doubling the deferral limit in the final three years before normal retirement age — but this is a lifetime provision that does not affect beneficiary rules.

Does the SECURE Act 10-year rule apply to an inherited 457(b)?

For governmental 457(b) plans, yes. The SECURE Act (effective January 1, 2020) amended IRC § 401(a)(9)(H) to impose the 10-year depletion rule on most non-spouse beneficiaries. These rules apply to governmental 457(b) plans through IRC § 457(d)(2), which explicitly incorporates the § 401(a)(9) minimum distribution rules.² IRS final regulations T.D. 10001 (July 2024) directly reference governmental 457(b) plans as subject to these rules.

If the decedent died on or after January 1, 2020, and the plan was a governmental 457(b), the entire balance must be depleted by December 31 of the 10th year following the year of death.

For non-governmental 457(b) plans, the § 401(a)(9) minimum distribution rules technically apply via § 457(d)(2) as well — but the practical outcome is different. Because the funds cannot leave the plan in a rollover, and because the plan document governs distribution options, the timing and form of distributions are constrained by the plan's design rather than by a beneficiary's free choice. Many non-governmental 457(b) plans require lump-sum distribution or a short payout schedule at death; few offer a full 10-year spread-out option.

Who is exempt from the 10-year rule (EDB categories)?

The same Eligible Designated Beneficiary (EDB) categories that qualify for the stretch IRA exception apply to inherited governmental 457(b) plans:

• Surviving spouse — unique rollover options available (see below)
• Minor child of the plan participant — EDB stretch until age 21, then 10-year window begins; only a direct child of the decedent qualifies, not any minor
• Disabled beneficiary (IRC § 72(m)(7))
• Chronically ill beneficiary (IRC § 7702B(c)(2))
• Not-more-than-10-years-younger beneficiary — sibling or close friend near the decedent's age

Most adult children who inherit a parent's governmental 457(b) are non-EDB beneficiaries subject to the full 10-year depletion requirement.

Annual RMDs during the 10-year window: the T.D. 10001 split

IRS final regulations T.D. 10001 (July 2024) apply to governmental 457(b) plans through § 457(d)(2)'s incorporation of § 401(a)(9). The same pre-RBD vs. post-RBD split that governs inherited IRAs governs inherited governmental 457(b) plans:

Decedent died before their Required Beginning Date (pre-RBD)

No annual RMDs are required in years 1–9. The only requirement is full depletion by December 31 of year 10. You have complete flexibility on the annual distribution amount and timing within the 10-year window.

The Required Beginning Date (RBD) for a governmental 457(b) participant is April 1 following the year the participant turns 73 (born 1951–1959) or April 1 following the year they turn 75 (born 1960 or later), per SECURE 2.0.³ Governmental 457(b) plans generally follow the same "still working" exception as 401(k) plans: a participant still employed by the plan sponsor past the RBD age may not be required to take distributions from that plan during their lifetime. At death, the still-working exception ends and post-death distribution rules take over.

Decedent died on or after their Required Beginning Date (post-RBD)

Annual RMDs are required in years 1–9, calculated using the Single Life Expectancy Table (IRS Pub. 590-B, updated 2022 via T.D. 9930) based on the beneficiary's age in the year after death. The factor reduces by 1.0 each subsequent year. The full remaining balance must still be depleted by December 31 of year 10.

The 2021–2024 IRS waiver notices (Notices 2022-53, 2023-54, 2024-35) excused missed annual RMDs from inherited accounts during those years. Those waivers have expired. Annual RMDs for post-RBD decedent inherited governmental 457(b) accounts for 2025 and beyond are required; missed distributions are subject to a 25% excise tax under IRC § 4974, reducible to 10% if corrected within the correction window under SECURE 2.0 § 302.

Year-of-death RMD

If the governmental 457(b) participant died after their RBD but had not taken their full distribution for the year of death, that shortfall must be distributed by December 31 of the year of death. You as beneficiary are responsible for completing this distribution. This rule applies equally to inherited IRAs, inherited 401(k)s, and inherited 457(b) governmental accounts.

Rolling an inherited governmental 457(b) to an inherited IRA

Rolling an inherited governmental 457(b) to an inherited IRA at a custodian of your choice is usually the right move for non-spouse beneficiaries. It provides better investment options, lower costs, and easier coordination across your broader financial plan.

Legal authority: IRC § 402(c)(11)

Section 402(c)(11), added by the Pension Protection Act of 2006, allows a non-spouse designated beneficiary to roll an inherited employer plan balance directly to an inherited IRA. Governmental 457(b) plans are included in this provision. Plans have been required to offer this option since 2010 — you cannot be forced into a lump-sum distribution simply because you're not the surviving spouse.⁴

The transfer must be direct (trustee-to-trustee only)

A non-spouse beneficiary cannot receive the distribution and re-deposit it within 60 days. The transfer must go directly from the governmental 457(b) plan to the inherited IRA custodian. Steps:

1. Open an inherited IRA at the receiving custodian (Fidelity, Vanguard, Schwab, etc.) in your name as beneficiary — before initiating any transfer
2. Request a direct rollover from the 457(b) plan administrator, payable to the new custodian for the benefit of the inherited IRA account
3. Ensure the account title reflects the inherited nature: "[Decedent Name], Deceased, [Plan Name] FBO [Your Name], Beneficiary" (exact format varies by custodian)

If the plan issues you a check made out to you personally, that is a taxable lump-sum distribution — not a rollover. It cannot be redeposited. Insist on a direct rollover payable to the receiving custodian.

The 10-year clock continues from the original death year

Rolling an inherited governmental 457(b) to an inherited IRA does not reset or restart the 10-year depletion clock. If the decedent died in 2022, your year-10 deadline is December 31, 2032 — whether the funds remain in the 457(b) plan or are transferred to an inherited IRA.

Non-governmental 457(b): no IRA rollover allowed

The most consequential rule for beneficiaries of non-governmental 457(b) plans: the funds cannot be rolled over to an inherited IRA.

Under IRS guidance, only eligible plans of governmental entities are eligible for rollovers under IRC § 402(c)(11). Non-governmental 457(b) plan distributions are not eligible rollover distributions. Any attempt to roll a non-governmental 457(b) distribution to an IRA creates an excess IRA contribution subject to the 6% excise tax under IRC § 4973 for each year the excess remains in the account.⁵

What happens to non-governmental 457(b) assets at death?

• Assets remain employer property: The funds in a non-governmental 457(b) are not held in trust for the participant — they are unsecured promises by the employer. If the employer becomes insolvent before paying a beneficiary, the beneficiary stands as an unsecured general creditor. This is the fundamental risk of non-governmental 457(b) plans during the participant's lifetime; it extends to beneficiaries.
• Distribution per plan document: The plan document governs what distribution options are available to beneficiaries. Common options include a lump-sum payment, installment payments over a defined period, or a scheduled payout. The plan may not offer a full 10-year spread-out distribution.
• Ordinary income tax: Distributions are taxed as ordinary income in the year received, at the beneficiary's marginal rate — just like inherited IRA distributions.
• Form 1099-MISC or 1099-R: Death benefits paid from a non-governmental 457(b) to a beneficiary's estate may be reported on Form 1099-MISC. Regular beneficiary installment payments are typically reported on Form 1099-R with distribution code 4 (death). Confirm with the plan administrator which form applies to your situation.⁵

Can the funds be rolled to another non-governmental 457(b)?

A participant during their lifetime can roll a non-governmental 457(b) to another non-governmental 457(b) plan if both plans permit it. At death, however, this option does not apply to beneficiaries — the beneficiary receives distributions as income under the plan's distribution terms and has no rollover options.

No 10% early withdrawal penalty: the unique 457(b) advantage

One significant difference between 457(b) plans (both governmental and non-governmental) and IRAs or 401(k) plans: 457(b) distributions are never subject to the 10% early withdrawal penalty under IRC § 72(t). This is because 457(b) plans are not "qualified retirement plans" under the tax code's § 72(t) penalty framework.⁶

For beneficiaries, this difference is largely academic — beneficiary distributions from inherited IRAs and inherited 401(k)s are also exempt from the 10% penalty under the death exception at IRC § 72(t)(2)(A)(ii). But for participants who inherited a governmental 457(b) and are taking distributions before age 59½, the no-penalty rule is confirmed regardless of age and regardless of the death exception.

Surviving spouse: unique options

A surviving spouse who inherits a governmental 457(b) account has more flexibility than a non-spouse beneficiary:

• Spousal rollover to own IRA or own 457(b): A surviving spouse can roll the inherited governmental 457(b) to their own IRA (not inherited IRA). This eliminates the 10-year depletion clock entirely — the funds are now part of the spouse's own retirement account, subject only to the spouse's own RMD schedule. This is almost always the right choice for surviving spouses who don't need immediate income.
• Maintain as inherited governmental 457(b): If the surviving spouse is under 59½ and needs income before that age, maintaining the inherited 457(b) account allows penalty-free distributions immediately. (457(b) distributions are never subject to the 10% penalty regardless of age, so the early-access advantage here applies equally to the spouse's own rollover IRA — but it bears noting.)
• Roll to inherited IRA: A surviving spouse can also roll to an inherited IRA (rather than their own IRA) if they prefer to defer required minimum distributions beyond what the spouse's own RMD schedule would require. The delay is limited — inherited-IRA spousal rules allow deferral until the decedent would have reached RMD age.

For surviving spouses of non-governmental 457(b) plan participants: the options depend entirely on the plan document. The plan may allow a spousal rollover to an IRA (since spouses retain rollover rights broader than non-spouse beneficiaries under some plan provisions), or it may limit the spouse to lump-sum or installment distributions. Check with the plan administrator immediately — there may be a time-limited election window.

Comparison: inherited governmental 457(b) vs. non-governmental 457(b) vs. inherited 401(k) vs. inherited IRA

Inherited Roth 457(b)

Many governmental 457(b) plans now offer a Roth 457(b) designation option, allowing after-tax salary deferrals that grow tax-free. For beneficiaries, an inherited Roth 457(b) follows the same general framework as an inherited Roth 401(k):

• The 10-year depletion rule applies, but with no annual RMDs in years 1–9 — Roth accounts have no Required Beginning Date, so decedents are always treated as pre-RBD, and T.D. 10001's annual-RMD obligation cannot trigger.
• A non-spouse beneficiary can roll an inherited Roth 457(b) directly to an inherited Roth IRA. The 5-year rule for tax-free earnings distributions uses the original owner's Roth 457(b) first-contribution year — the rollover date does not restart the clock.
• Qualified distributions (after the 5-year period) are tax-free and penalty-free. Distributions of contributions (basis) are always tax-free.

Starting in 2024, SECURE 2.0 eliminated lifetime RMDs from Roth 401(k) and Roth 403(b) accounts — the same logic likely applies to Roth governmental 457(b) plan provisions, though plan documents may need updating to reflect this. Confirm with the plan administrator whether the Roth 457(b) portion had any RMD requirement during the participant's lifetime.

Tax planning for an inherited governmental 457(b)

Once rolled to an inherited IRA, an inherited governmental 457(b) is taxed identically to any other inherited traditional IRA. The same 10-year planning strategies apply:

• Bracket management across 10 years: Model your full income picture across the depletion window before choosing an annual distribution amount. Government employees who inherit from a retiring public-sector parent may have pension income, Social Security, and existing IRA distributions competing for bracket space. Use the 10-Year Withdrawal Optimizer to scenario-test.
• Front-load in income gaps: If you have a lower-income year early in the 10-year window — phased retirement, a leave of absence, a career change — take larger distributions then rather than in peak-earning years.
• Roth conversion coordination: You cannot convert a non-spouse inherited account to Roth directly. But you can take annual distributions from the inherited account and simultaneously Roth-convert a similar amount from your own traditional IRA, net-converting without increasing total tax load. The Roth Conversion Coordinator models this.
• QCDs if you're 70½+: Qualified Charitable Distributions from your own IRA (up to $111,000 in 2026) reduce your AGI, creating bracket room for inherited account distributions without triggering higher marginal rates or IRMAA surcharges.⁷
• Avoid the year-10 tax bomb: A $400,000 account growing at 6% for nine years becomes $676,000 — all taxable in year 10. Spreading distributions across the window almost always reduces total lifetime tax.
• IRMAA planning: Large distributions from an inherited 457(b) in the two years before Medicare enrollment can spike Part B and D premiums via the IRMAA lookback. See the IRMAA guide for timing strategies.

Action checklist: what to do if you've inherited a 457(b)

1. Identify the plan type first. Was the employer a government entity (city, county, state, public school) or a tax-exempt nonprofit (hospital, foundation, charity)? This single fact determines every other option.
2. Request plan documents and beneficiary statement. Get the plan summary, distribution election forms, and confirmation of your designated-beneficiary status.
3. For governmental 457(b): Contact a receiving custodian (Vanguard, Fidelity, Schwab) and open an inherited IRA before initiating the transfer. Then request a direct rollover from the plan administrator. Do not take a check payable to yourself.
4. For non-governmental 457(b): Work within the plan's distribution options. Do not attempt an IRA rollover. Consult a tax advisor before selecting a distribution schedule — the tax hit from a forced lump sum can be severe on a large account.
5. Identify the death date relative to the RBD. Determine whether the participant died before or after their Required Beginning Date (see RBD chart in the inherited IRA RMD rules guide). This controls whether annual RMDs are required in years 1–9.
6. Check for a year-of-death RMD obligation. If the participant died after their RBD and had not taken their full annual distribution for the year of death, that shortfall must be distributed by December 31 of the death year.
7. Model the 10-year distribution schedule across your full income picture before choosing an annual amount. This is where a fee-only advisor specializing in inherited accounts provides the most value.

Sources

1. IRS — Retirement Topics: 457(b) Contribution Limits. 2026 elective deferral limit $24,500 per IRS Rev. Proc. 2025-32; age-50 catch-up $8,000; ages 60–63 super catch-up $11,250 per SECURE 2.0 § 109. Last-three-year special catch-up provision per IRC § 457(b)(3). Verified May 2026.
2. IRS — Retirement Topics: Beneficiary. SECURE Act 10-year depletion rule for non-EDB beneficiaries. Governmental 457(b) plans subject to § 401(a)(9) minimum distribution rules via IRC § 457(d)(2). T.D. 10001 (July 2024) final regulations explicitly apply to governmental 457(b) plans.
3. IRS — Retirement Plan and IRA Required Minimum Distributions FAQs. Required Beginning Date for governmental 457(b) plans: April 1 following the year of age 73 (born 1951–1959) or age 75 (born 1960+) per SECURE 2.0. Still-working exception; post-death distribution rules.
4. MissionSquare — Rollovers by Non-Spouse Beneficiaries. IRC § 402(c)(11) permits non-spouse designated beneficiary to roll governmental 457(b) balance directly to an inherited IRA. Plans required to offer this option. Direct rollover only; no 60-day rollover option for non-spouse beneficiaries.
5. IRS — Non-Governmental 457(b) Deferred Compensation Plans. Non-governmental 457(b) distributions are not eligible rollover distributions. Attempted IRA rollover treated as excess contribution under IRC § 4973. Assets held as general employer property; subject to creditor claims. Distribution reporting on Form 1099-MISC or 1099-R.
6. IRS — Retirement Topics: Exceptions to Tax on Early Distributions. IRC § 72(t) 10% additional tax applies to qualified retirement plans and IRAs — not to 457(b) deferred compensation plans. 457(b) distributions at any age are penalty-free. Death exception under § 72(t)(2)(A)(ii) provides additional coverage for IRA/QRP beneficiaries.
7. IRS Publication 590-B — Distributions from Individual Retirement Arrangements (IRAs). QCD 2026 limit $111,000 per IRS inflation adjustment. Single Life Expectancy Table (T.D. 9930, 2022 update). Excise tax under IRC § 4974; SECURE 2.0 § 302 correction window. Annual RMD rules for post-RBD decedent inherited accounts.

Tax values verified as of May 2026. Governmental 457(b) minimum distribution rules per IRC § 457(d)(2)'s incorporation of § 401(a)(9). T.D. 10001 (July 2024) applies to governmental 457(b) plans. Non-governmental 457(b) rollover prohibition per IRS guidance on IRC § 402(c)(11) applicability. Consult a tax advisor for your specific situation.