J.K. Lasser's Your Income Tax 2013: For Preparing Your 2012 Tax Return

7.22 Government and Exempt Organization Deferred Pay Plans

Federal government civilian employees may make tax-deferred salary-reduction contributions to the Federal Thrift Savings Plan. Employees of state and local governments and of tax-exempt organizations may be able to make tax-free salary-reduction contributions to a Section 457 deferred compensation plan.

Federal Thrift Savings Plan.

Federal employees may elect to make salary-reduction deferrals to the Thrift Savings Plan up to the elective deferral limit for 401(k) plans (7.17). Deferrals are not taxed until distributed from the plan. The deferred amount is counted as wages for purposes of computing Social Security taxes and benefits.

Distributions from the Thrift Savings Plan are generally fully taxable. However, lump-sum distributions are eligible for tax-free rollover treatment (7.7) and employees born before January 2, 1936 are eligible for special averaging (7.4). If you receive a distribution before age 59½, you are subject to the 10% penalty for early distributions unless an exception applies (7.15).

Section 457 plans.

State and local governments and tax-exempt organizations other than churches may set up Section 457 deferred compensation plans. Employees may annually defer compensation up to the 401(k) elective deferrable limit (7.17). Employees in state and local government 457 plans who are 50 years of age or older may be permitted by the plan to defer an additional “catch-up” amount (7.17).

The plan also may provide ...