Exploring Investment Options as a Washington State Employee
Host Ethan Meikle discusses various investment options available to Washington State employees in this episode of the Washington State Retirement Planning Podcast. He analyzes both employee-sponsored benefits such as 403b, 457, and private options like IRAs. He delves into the utilization of life insurance as a potential alternative for a retirement saving strategy. A case study is presented, where improper planning led to a client getting taxed unexpectedly on her sick leave. Ethan concludes by highlighting the importance of having proper knowledge about benefits and investment options.
Outline
00:07 Introduction and Overview
00:27 Investment Options for Washington State Employees
01:00 A Personal Story: Retirement Planning Experience
01:23 Understanding VEBA and Its Importance
03:20 Employer-Sponsored Retirement Options
03:48 Understanding 403b, 457, and DCP Plans
04:26 Benefits of Roth 403b Plan
05:33 Flexibility of Employer-Sponsored Plans
06:23 Investment Options in DCP, 457, and 403b Plans
08:15 Private Savings Options: Roth IRA, Brokerage Accounts, and Life Insurance
08:33 Understanding the Drawbacks of Roth IRA
10:23 Exploring Life Insurance as a Retirement Account
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Transcript
Welcome another episode of the Washington State Retirement Planning Podcast. I’m your host Ethan Meikle, I’m here to guide you guys through your complicated state retirement benefits so you can become more educated on them and make better decisions. So hopefully it will empower you guys to retire earlier, pay less in taxes, and enjoy more free time with your loved ones.
So today’s episode is going to be all about what type of investment options do I have as a Washington State Employee. So I’m going to tackle what you have as an Employee Sponsored Benefit. So things like 403b, 457, things that you can get as an employee. And then I’m going to talk about private options, things like IRAs.
And I’m going to go into a little bit about life insurance. Now, don’t worry, I’m not here to sell you guys life insurance, but it is a powerful tool that I personally use myself. So, I just want to give you guys kind of a high level overview of how it could be thought of as a potential alternative for a retirement saving strategy.
Now before we keep going I wanted to just share a quick story with everybody. Yes, so over the past year I’ve been working with We’re going to be working with an administrator at a school district and helping her get transitioned to retirement. So through working with us, she’s going to retire about four years earlier than the state said she could have, or actually five years.
So anyways, going through the process, she actually retired this past school year. We come to find out that we wanted to have her unused sick leave moved into the VEBA. Now VEBA is essentially like a Health Savings account. It’s the Voluntary Employees Benefit Administration.
It would essentially put a new sick leave in there, and the money that goes in there is not taxed, and it comes out tax free as long as you use it for medical. So it’s a really big tax advantage account to use. And I’ve been doing retirement planning for teachers for 9 going on almost 10 years now. And I always thought that it was common practice at every school district in the state.
Offer VEBA turns to find out that this particular school district did not, or at least their bargaining agreements didn’t renew. And they flat out declined her option to do that. But instead of notifying her ahead of time, they just sent her a check for the remaining amount after they took out taxes. So they took about 4, 000 out.
In taxes alone, no warning. Now, because she’s this person as an administrator, she’s already in a high enough income area. Now, her sick leave just got cashed out. He’s going to add on on top of her income for the year. So, it’s going to throw off a lot of the planning that we already did. So, what I’m currently working with, so I’m, so currently I’m trying to get this issue resolved.
So, my message for you guys as an action item is when you go to retire, Talk to your school district and make sure that they do offer a VBA benefit because if they don’t you want to know that ahead of time so you can plan strategically for it. You don’t get caught up in this client situation where we thought they could because I had clients retire the year before no problem do it and all of a sudden this year it’s changed.
So it’s just something that You guys need to be aware of. Now I’m going to keep fighting for this client. I’ve already contacted VEBA and the union and we’re going to see if we can get them to reverse the decision because it really makes no sense why you would not offer a VEBA benefit to your employee because it has such large tax advantages and doesn’t cost the employer anything.
So I’ll keep you guys updated on that part. Now let’s get on with today’s episode.
So know all of you guys have your state pension plans, which are great. But they were not designed to replace your income in the future in full, and neither was Social Security.
So that’s why your school district has actually sponsored a few different other programs for you to be able to save into for your future. And it’s a really good idea to do so, so you can have the flexibility that you want in your retirement. You don’t have to work till age 62 or 65, and if you wanted to retire earlier or you need a little extra income in the future, you could have that money to fall back on. So to start, the employer sponsored options you’re gonna have available to you are the state’s DCP plan, as well as a 4 57 plan.
And those are just private versions that are just like the DCP, and then you have your 4 0 3 B, sometimes known as a TSA account available to you as well. Those three different types of accounts are employer sponsor, which means they can run through your payroll. So you set it up one time and say how much you’re gonna do per month and then going forward every single month, you’re gonna have a certain amount of money get put into those retirement accounts for you.
So it’s, you’re kind of outta outside out mind just automatic systematic savings. So all those accounts are gonna be done on a pre-tax basis unless you’re lucky enough to live in a school district that offers a Roth four three plan, then you can have that go in as an after tax contribution and it’s works just like a Roth I a where you’re paying, taxing that money now.
So the benefits you have if you use a Roth four three B over, say like a Roth IRA, is that there’s no income restrictions. So it doesn’t matter how much money you can make, you can always use it. Also, it allows you to put up to three times more money in this plan than a Roth A would. So you can really catch up or supercharge your tax retirement savings, but using this Roth four three plan.
But remember, it’s only available to select school districts, so you’re gonna have to double check with your payroll department if that’s an option. And if it’s not, just ask ’em if they could presidentially open it up to be an option. I’ve helped countless districts actually do it myself, and it’s usually not a very hard process.
A lot of times it’s just that they don’t know it’s an option or they don’t want to take the steps to actually do it. In fact, it’s a one page form. It’s usually just a box checked, a couple of signatures. It’s actually a lot easier than most districts make it out to be anyways, so those are the different employer sponsored options you have available to you.
So all those employer sponsored plans I just mentioned. Our open enrollment, so you can start one anytime you want to, and you can stop putting money in any given month. You can also increase or decrease what goes in on a month to month basis. So it’s very flexible. And if you can only afford say $50 a month, then do it.
A small step forward is still a step forward and it’s better than standing still. And by the end of the year, you’re gonna have $600 that you would’ve put into the plan. And it’s just gonna snowball over time. And as you have more cash flow available, you can always increase it. Accidentally comes up and you can’t do it anymore, then turn it off.
That’s the beauty of flexibility. All these plans allow you to save up to a certain threshold, so it’s $19,000 if you’re under age 50 or up to 25,000 if you’re over age 50. Also, they have no income limits, as I kind of mentioned earlier, so matter what you make, you can always use these different employer sponsored plans.
And then as far as the investment options goes, The DCP is limited to what the state approves. It’s pretty much exact same as a Plan three account. So if you’re on plan three, you have a DCP, you’re really just throwing more money in the same basket. So I typically don’t recommend doing that. If you use one of the 4 57 PRI from a private institution, you’re gonna be limited to what they have approved in their list.
Sometimes they’re great and they have, you know, thousands of options. Sometimes not so much. Sometimes you might wind up in annuity by mistake. So it’s, you gotta be careful when you choose what kind of company you’re gonna be opening up that plan with. And the same goes for the 4 0 3 plan. So the 4 0 3 B, also known as a T S A or tax shelter annuity account is very similar to 4 0 1 k.
In order to get one of these, you actually have to open it up yourself. Through one of the approved vendors on your school district’s website. So every school district has an approved list of what company you’re allowed to use. Now on this list, there are actually two different kinds of four, three Bs on there.
And they’re not gonna be obvious. You actually have to know the companies and how each of their four three B platforms work. So there gonna be some that are T S A or tax shelter annuities. And there are some that are traditional 4 0 3 B or four three sevens if you wanna get technical with it. And they work completely different than one another.
A T S A is an annuity, so the money’s gonna be locked up there for quite some time. Fees are typically higher. Investment options charge more than you could get elsewhere, and then they’re gonna be limited to what that company selects. Oftentimes, those investment options are also the company’s funds. So you buy from X, Y, Z company, you’re gonna have X, Y, Z mutual funds to choose from.
So you’re not gonna get the broadest range of investment options there if you choose to go on the traditional side, which is that I like to stay on. It’s flexible. It’s not an annuity. So you choose the company and decide you don’t like them. You can leave and there’s no hard feelings, there’s no penalties.
Just move your money somewhere else. You want to trade out investment options. They have thousands available, so that’s why I like staying on that side There. Now, as far as the private savings options goes, the most common one is gonna be the Roth I r a, but you also have the ability to save into, you know, individual stocks and bonds and brokerage accounts, as well as using life insurance.
So Roth IRA is gonna be the most common. It basically allows you to save money on the after-tax basis. It’s gonna grow tax free. So if you put in a hundred dollars and I think doubles to two or $300, you take all that money out, complete the tax free, but as good as the Roth R A sounds, there are some big drawbacks to ’em.
They have income restrictions. If you make too much, you can’t use it. Fees are another big drawback to these Roth I R A accounts because a lot of these Roth IRAs that I see people have are through insurance companies, or they’re through some big chain brokerage firm.
And what they have on the backend are fees that are usually five to 6% on a transactional basis. So what that means is I put a hundred dollars into this Roth array with X, Y, Z company. They’re gonna assess a 5% transaction fee on it, or sales charge is the technical term behind it. So I put in a hundred dollars, they charged me five.
Not only have $95 in the account to start off with, to be invested, so you’re starting off at a negative 5%. It’s not a very, very good deal, in my opinion, and it takes years to break even on using this kind of plan. So you already have a Roth that I, with some big company. You may wanna take a look at it to see what those fees actually are.
The cheaper list is if you look on the investment list, that’ll be whatever, whatever investment. At the end of it, you’ll just see the letter a. And that’s just an A share mutual fund. And all a share mutual funds are gonna have that five to 6% transaction charge on it. So just a quick tip for you there.
Outside of that though, Roth areas are great. Just make sure you’re not paying too much in fees. You can always use a brokerage account so you can buy the individual stocks and bonds and try to find the next Netflix or Amazon. If you can, good luck, tell me about it. But more or not, that’s not gonna be the best way to about go about saving, because you’re putting all this money on this one specific company or a couple of dozen companies, you’re gonna be subject to a greater deal of risk and your portfolio’s gonna see some significant swings.
Those brokerage accounts aren’t for people that have low risk tolerances or a short time horizon and can’t afford to ride the rollercoaster out. And then you have the life insurance option, but it’s not the one you’re thinking about. It’s not the one you currently have. In fact, this one is designed to be like a retirement account.
So it’s the way you structure it to make it work where it accumulates cash very fast. And in fact, Roth raised were based off of this kind of plan. And this plan actually allows you to grow money on a tax free basis, pull money out on a tax free basis anytime you want to. You don’t have to wait to a certain age like you do in those other accounts.
This one also has no income limitations to it, no contribution limits to it. So you can put in however much money you want to. And as far as how the money grows, It can either grow on a guaranteed basis, so you can get a guaranteed, you know, four or 5% on this money every single year. So you don’t have to worry about the market if you don’t want to, or you can tie it to the market and get some of the gains in the market goes up and none of the losses.
So it’s a lot less risky, is from an investment standpoint to use that. Now, it does have its drawbacks. It’s definitely not for everybody. So it does have to be designed correctly and more often than not, I see this all the time where people go into the school districts and knock on doors. And they try to sell you some kind of whole life policy and it, they tell you you can use it for retirement and it’s a death benefit, and that’s not the case.
It’s one or the other. You can’t get both. So you’re designed for cash value. It has to be designed for that. So if you were sold or actually bought one of those things, chances are it wasn’t designed with you in mind and it just paid out a huge commission to the advisor on the backend. The fact is, if you design this correctly, the commission is very little because what drives commission is what drives the price of the policy, and that’s the death benefit.
See, when you’re designing life insurance for cash value, strictly what you’re doing is buying the least amount of death benefit legally possible. To get all of those benefits and at the same time, you have put the most amount of cash into it because death benefit drives costs also what drives the commission.
So you’re gonna see too many people actually design these properly because they can’t afford to do it. So this is the exact way that I have my own retirement account set up. It’s what I’ve done for my parents as well as how I fund my kids’ education.
All right, so that’s a wrap for today’s episode. I hope this you guys learned a bit about what options you guys have available to you, the pros and cons between them, so you can have a better educational background when you go to approach these to decide which one is right for you and which ones aren’t.
If you guys want more education on these type of topics, make sure you head over to our website. W A T R S P E R S, that’s WashingtoTERSPERS. com. There I have cataloged all of my videos, podcasts, and articles in one place, plus I have a section with free resources for you guys to download. And then I also have, our investment advice service available to you guys.
So if you guys want investment advice on Plan 3 or on your DCP accounts. That is available for you guys on there as well. So feel free to check that out. And until next time, remember that your future depends on what you do today.