If you work for a Washington school district, you probably have a few places to save for retirement. There’s your Plan 3 account (TRS 3 for teachers, SERS 3 for classified staff). There may be a 403(b) through your district. And there’s the state’s Deferred Compensation Program, which most people just call the DCP.
For a long time, I wasn’t a big fan of the DCP. The main reason was simple: it had no Roth option. Every dollar went in pre-tax, and the investment choices were the same ones you already had in Plan 3. So for most people, it didn’t add much.
That changed when new legislation added a Roth option to the DCP. Now the DCP can do things your other accounts can’t. In this post, we’ll walk through when it makes sense to move some of your Plan 3 savings into the DCP, and when it might make sense to switch your 403(b) contributions over to it too.
What is the DCP, in plain English?
The DCP is a savings account your employer sets up for you. Money comes straight out of your paycheck and goes into investments you pick. It works a lot like a 401(k) at a private company. The official name for this kind of plan is a 457 plan.
Think of it like a piggy bank with two slots. One slot is pre-tax: you skip paying taxes on the money today, but you pay taxes when you take it out later. The other slot, the new one, is Roth: you pay taxes on the money today, and then it can come out tax-free in retirement.
Before the change, the DCP only had the first slot. Now it has both. That one change is why I’ve changed my mind about it.
Reason #1 to use the DCP: you control your contributions
The first big reason to use the DCP is control. With the DCP, you can start, stop, raise, or lower your contributions any time you want. Got a raise? Bump it up. Need extra cash for a few months because the car broke down? Turn it down. You’re in charge.
Plan 3 works very differently. When you pick your contribution rate in Plan 3, you’re locked into it until you leave that employer. If you start a job and choose 15%, you’re at 15% for as long as you stay there. You can’t change it next year, or in five years, or in twenty.
Here’s an easy way to picture it. Plan 3 is like a gym membership with a contract you can’t cancel. The DCP is like a pay-as-you-go gym. Both get you to the gym, but only one lets you change your mind.
Reason #2 to use the DCP: you control your taxes
The second reason is the new Roth option. It gives you control over when you pay your taxes. The idea is simple:
- Roth means you pay your taxes now, and the money comes out tax-free later.
- Pre-tax means you put off the taxes now, and you pay them in the future when you take the money out.
So it’s up to you when you’d rather pay. Most people I talk to would rather bite the bullet now, while they’re working and their income is higher. That way, in retirement, taxes are one less bill to worry about. Taxes in retirement can make things ugly, and in a lot of cases people end up paying more than they expected.
Why many state employees don’t drop to a lower tax bracket
A lot of people assume their taxes will go way down in retirement. For Washington state employees, that often isn’t true. You have a guaranteed pension, and you have Social Security. Those two paychecks keep coming after you stop working.
Because of that, the drop in income when you retire isn’t as big as people think. Many of the state employees I work with don’t change tax brackets at all when they retire. If your bracket stays the same, putting off taxes doesn’t save you much. And if you add big withdrawals from pre-tax accounts on top of a pension and Social Security, you could even land in a higher bracket.
Everyone’s situation is a little different, so check with your own CPA or advisor to see if this applies to you. But for most state employees I talk to, it does, and that’s why the Roth DCP deserves a hard look.
When to switch from TRS 3 to the DCP: use your 90-day window
Since your Plan 3 rate is locked, you don’t get many chances to change it. The big one comes when you change employers. When you start with a new employer, you have 90 days to pick a new Plan 3 contribution rate.
That 90-day window is the best time to look at the DCP. You can lower your Plan 3 rate and send the difference into the DCP instead. You save the same amount each month, but now part of it sits in an account you can adjust any time, and you can choose Roth for it.
A real example: going from 15% down to 5%
I recently worked with a client who had just started a new job. For a long time she had been putting 15% into Plan 3. Our advice was to drop her Plan 3 rate down to just 5%. Then we opened a DCP account, and she started sending the other 10% there.
As soon as the Roth DCP was ready, the plan was to switch that 10% into Roth. She was also already maxing out a Roth 403(b). So this gave her a way to supercharge her Roth savings, and the DCP lets her put in more than 10% if she ever wants to.
Why go to all this trouble? Most state employees who put their whole career into Plan 3 end up with over 90% of their wealth in Plan 3, or in pre-tax accounts in general. That’s a headache in retirement. Every dollar you take out gets taxed, and it’s hard to get money out without getting hit hard on taxes.
By using a Roth strategy now, she pays taxes on some of her money today and starts building a pile of tax-free money. That gives her more control over her wealth when she retires.
What this looks like with numbers
Let’s use a made-up teacher named Maria to see how this works. Maria earns $70,000 a year. She saves 15% of her pay either way, which is $10,500 a year. The only question is where it goes. We’ll assume she saves for 20 years and her investments grow 6% a year. These are example numbers, not a promise of what any account will earn.
| Setup | Plan 3 (pre-tax) each year | Roth DCP each year | Pre-tax balance after 20 years | Tax-free balance after 20 years |
|---|---|---|---|---|
| Option A: 15% in Plan 3 | $10,500 | $0 | About $386,300 | $0 |
| Option B: 5% in Plan 3 + 10% in Roth DCP | $3,500 | $7,000 | About $128,800 | About $257,500 |
Both options end up with about the same total, roughly $386,300. The difference is what happens when Maria takes the money out. In Option A, every dollar is taxable. In Option B, about two-thirds of her savings can come out tax-free.
There’s a trade-off. With Option B, Maria pays taxes on that $7,000 now, so her take-home pay is a bit smaller today. If she’s in the 22% bracket, that’s about $1,540 more in taxes each year. She’s choosing to pay that bill while she’s working, so she has more freedom later. With a pension and Social Security already filling her lower brackets, that’s often a smart trade.
Should you switch your 403(b) to the DCP?
Now let’s talk about 403(b) accounts. Many school districts offer a Roth 403(b), and some don’t. It depends on your district. If your district doesn’t offer a Roth 403(b), the money you have going into your 403(b) is most likely pre-tax. You’re putting off taxes until retirement.
If that’s you, the Roth DCP may be a better home for your savings. It lets you pay your taxes now instead of later, even if your district’s 403(b) has no Roth option. So it may make sense to switch from a 403(b) to the DCP, especially once the Roth DCP is available to you.
If you already have a Roth 403(b)
I’m a big fan of Roth 403(b) accounts. Besides the tax benefits, they often have more investment options. But not all 403(b) accounts are built the same. The ones built on annuities can have very limited investment choices, and the fees can quietly eat away at your money behind the scenes.
So if you have a Roth 403(b), it may or may not make sense to switch your contributions to the Roth DCP. It depends on your situation and what kind of account you have. Take a deeper look before you make a move.
Fees only matter if you get nothing for them
Here’s the key question about fees: what are you getting for them? Fees are only a problem if you aren’t receiving anything in return. A fee that pays for real, ongoing planning can be worth it. Someone who helps you pick the right accounts, plan your withdrawals, and avoid costly mistakes earns their keep.
But if the company holding your 403(b) charges high fees and never talks to you, never does any planning, and never checks in, then you’re paying for nothing. In that case, switching your new contributions to the DCP and cutting those fees could make a lot of sense. Know what you’re paying and what you’re getting for it.
Use both: Roth 403(b) and Roth DCP together
Remember my client who was already maxing out her Roth 403(b)? This is where the Roth DCP really helps. The IRS gives the 403(b) and the DCP separate contribution limits. That means you can max out your Roth 403(b) and then put another full amount into the Roth DCP on top of it.
Picture two buckets sitting side by side. Filling one bucket doesn’t take any room away from the other. If you’re able to save a lot, you can roughly double how much goes into tax-free Roth savings each year. Check the current IRS limits each year, since they usually go up.
There’s another nice perk. These employer plans have no income limits for Roth contributions. It doesn’t matter how much you or your spouse earn. A regular Roth IRA cuts people off once their income gets too high, but these two workplace accounts don’t.
A quick checklist before you switch
- Are you about to change employers? If so, your 90-day window to change your Plan 3 rate is coming up.
- Is most of your money in pre-tax accounts like Plan 3? If so, Roth savings can give you more balance.
- Does your district offer a Roth 403(b)? If not, the Roth DCP may fill that gap.
- What fees does your 403(b) charge, and what do you get for them?
- Are you already maxing out a Roth 403(b)? The Roth DCP has its own separate limit.
If you’d like help sorting through your own accounts, you can schedule a personal meeting and we’ll look at your situation together.
Frequently Asked Questions
Can I change my TRS 3 contribution rate any time?
No. Your Plan 3 contribution rate is locked until you leave your employer. When you change employers, you get a 90-day window to choose a new rate. The DCP is different: you can change your contributions whenever you want.
What is the Roth DCP?
The Roth DCP is the Roth option inside Washington’s Deferred Compensation Program. You pay taxes on the money when you put it in, and then it can come out tax-free in retirement. Before it was added, all DCP money went in pre-tax.
Can I have both a 403(b) and a DCP?
Yes. The IRS gives them separate limits, so you can contribute to both in the same year. There are also no income limits on Roth contributions in these plans, so it doesn’t matter how much you or your spouse earn.
Will my taxes be lower in retirement?
Maybe not. Washington state employees have a guaranteed pension plus Social Security, so their income often doesn’t drop much in retirement. Many don’t change tax brackets at all. Talk with your CPA or advisor to see how this applies to you.
Should I always move my 403(b) money to the DCP?
Not always. A good Roth 403(b) can have more investment options. It makes the most sense to switch when your district has no Roth 403(b), or when your 403(b) charges high fees and you get little or no planning or service for them.
The bottom line
Moving some of your savings to the DCP can give you more control than you have in Plan 3. You get control over your contributions, and with the Roth option, control over your taxes. Down the road, that can be a huge benefit.
If you’re about to change employers, use your 90-day window to think about shifting some money from Plan 3 into the DCP. If you’re putting money into a pre-tax 403(b), consider switching to the Roth DCP. And if you’re already maxing out a Roth 403(b), the Roth DCP is there as a second bucket for even more tax-free savings.
Your future depends on what you do today.
P.S. It’s free to join. Over 150 members are already in it, plus you’ll get free courses and resources to help you plan your retirement with confidence.
