Washington’s Deferred Compensation Program, or DCP, is the most widely available extra retirement plan for state employees. For a lot of people, it is the only way to save beyond their pension through work. Some employers even sign you up automatically when you start.
But the DCP has always had one big catch. It only lets you save pre-tax. A bill in the state House, House Bill 1752, aimed to change that by adding a Roth DCP option. This post explains what a Roth DCP is, why people wanted it, and how to think about choosing between the two.
A quick note on timing. This article is based on a video made while the bill was still moving through the legislature. Rules and dates can change, so always confirm the current details with the Washington State Department of Retirement Systems (DRS) before you make changes to your account.
The Problem With a Pre-Tax-Only DCP
Here is how the regular DCP works. You put money in before income tax is taken out. That lowers your taxable income today. The money then grows without being taxed each year. This is called tax-deferred growth.
The tax bill does not disappear, though. It just waits for you. When you take the money out in retirement, you pay income tax on everything. That means the money you put in and all the growth on top of it.
Think of it like a farmer who does not pay tax on the seeds he plants. Sounds great. But when the crop comes in, the tax collector wants a slice of the whole harvest. If the harvest is huge, the slice is huge too.
For many state employees, that is fine. A tax break now can be a real help. But for others, especially people who expect to earn a lot or expect tax rates to rise, being stuck with only one choice was frustrating.
What Is House Bill 1752?
House Bill 1752 was introduced to add a Roth option to the state’s DCP. The bill itself is short. In plain words, it says that if it passes, the state must offer a Roth option in the DCP by January 1, 2024.
That is really all it says. It does not explain every detail of how the Roth DCP would work. It does not say whether you could move existing pre-tax money over to the Roth side. Those details would be worked out later by the state.
At the time of the video, the bill had a lot of support. A Roth option had been one of the most requested features among state employees for years. That is why the video’s host expected it to move forward.
What Is a Roth DCP, and How Does It Work?
A Roth DCP would work almost the same way your DCP does now. You would still put money in each month straight from your paycheck. You would still pick from the same investments, including the target date funds. Nothing about the funds changes.
The only thing that changes is when you pay tax. With a Roth, you pay income tax on the money now, before it goes in. Then it grows tax-free. When you take it out later, and you follow the plan’s rules, you do not owe income tax on the growth.
You would get to choose. Some of your savings could go pre-tax, some could go Roth, or you could pick just one. The choice is yours each year based on what makes sense.
Pay Taxes Now or Pay Taxes Later
That is the whole decision in one sentence. Do you want to pay tax on the seeds, or on the harvest? There is no one right answer for everybody. It depends on where taxes stand today and what you think they will do in the future.
Let’s use a simple example to see how this plays out.
A Simple Example: Pre-Tax vs. Roth
Say you have $10,000 of pay you want to save. Your tax rate today is 22%. Over the years, the money grows to four times its size. Below is what you would have left after taxes under each choice, if your tax rate in retirement is also 22%.
| Step | Pre-Tax DCP | Roth DCP |
|---|---|---|
| Pay you want to save | $10,000 | $10,000 |
| Tax paid today (22%) | $0 | $2,200 |
| Amount that goes in | $10,000 | $7,800 |
| Value after growing 4x | $40,000 | $31,200 |
| Tax paid at withdrawal (22%) | $8,800 | $0 |
| What you keep | $31,200 | $31,200 |
Look at the last row. It is a tie. When your tax rate stays the same, pre-tax and Roth give you the same result. What matters is what happens to your tax rate between now and retirement.
What If Your Tax Rate Changes?
Now let’s change the tax rate in retirement and keep everything else the same. This is where the choice starts to matter.
| Tax Rate in Retirement | Pre-Tax DCP (You Keep) | Roth DCP (You Keep) | Winner |
|---|---|---|---|
| 12% | $35,200 | $31,200 | Pre-Tax |
| 22% | $31,200 | $31,200 | Tie |
| 32% | $27,200 | $31,200 | Roth |
If your tax rate drops in retirement, pre-tax wins. If it goes up, Roth wins. Since nobody can predict future tax rates for sure, many people like to have both types of money. That gives them options later.
This is a simplified example. It ignores things like state rules, Social Security taxes, and Medicare costs. But it shows the big idea clearly.
The Benefits of a Roth DCP
Outside of taxes, the video pointed to two clear advantages of a Roth DCP over a Roth IRA.
1. There Are No Income Limits
A Roth IRA has income limits. If you earn too much, you cannot put money in directly. Some people get around this with a trick called a backdoor Roth IRA, but that strategy could go away at some point.
A Roth DCP would not have those limits. It would not matter if your family makes $250,000 a year or a million dollars a year. You could still take part and get all the tax-free growth. That is a big deal for higher earners who have been shut out of Roth accounts.
2. The Contribution Limits Are Much Higher
The DCP limit is always higher than the Roth IRA limit. As of 2022, the DCP limit was $27,000 for people over age 50. That number includes the extra catch-up amount that older workers are allowed to add.
Picture a bucket. A Roth IRA is a small bucket. A Roth DCP would be a much bigger one. That means far more of your money could grow tax-free over your career. Limits change most years, so check the current numbers with DRS.
The video host said that used well over a full career, this strategy could save five, six, or even seven figures in taxes. Results depend on your own numbers.
The Downsides That Would Stay the Same
A Roth option would not fix everything about the DCP. The same drawbacks the plan has today would carry over to the Roth side.
- Limited investment choices. At the time of the video, the DCP offered just seven investment options plus the target date funds.
- Limited access to your money. You generally can only get your money out when you separate from service, meaning you leave your state job.
- No loans. Unlike some workplace plans, the DCP did not allow you to borrow from your balance.
These points do not make the DCP a bad plan. They just mean you should know what you are signing up for. Money in the DCP is really long-term money, so do not put in cash you might need soon.
Picking the right mix of investments inside your DCP also matters. If you want help with that, book a time on our personal help page to talk it through.
The Big Question: Would There Be Internal Roth Conversions?
Here is the part the video host was most curious about. A Roth conversion means moving money from a pre-tax account into a Roth account. You pay income tax on the amount you move, and after that it grows tax-free.
Under the old rules, you could only do a Roth conversion after you left your job. That is when you get access to the money. Then you could roll some of your pre-tax DCP into a Roth IRA.
An internal conversion would be different. You would move money from your pre-tax DCP to your Roth DCP without ever leaving the plan. You would still pay tax on the amount you move. But you could do it while you are still working, at any age.
Why This Could Be Powerful
Say you are young and your pay is still fairly low. You might be in a low tax bracket right now. That is a great time to move some money into a Roth, because you would pay tax at a small rate.
Doing this on purpose, year after year, is called filling up your tax brackets. You move just enough money to use up the cheaper brackets without spilling into the expensive ones. Done well, this can cut your long-term tax bill by a lot.
The bill did not mention internal conversions at all. It was written in a very basic way. The video host was hoping the state would add this small feature, because it would open the door to Roth conversions for people of all ages. Whether it was included is something to check with DRS.
How to Decide Between Pre-Tax and Roth
Since it comes down to your own tax situation, here are a few questions to ask yourself. There are no perfect answers, but they can point you in a direction.
- Am I in a low bracket now? If so, Roth often looks attractive, since you pay tax at a small rate today.
- Do I expect a high income in retirement? A big pension plus Social Security plus other savings can push your retirement bracket higher than you think.
- Do I think tax rates will go up? If yes, paying tax now at today’s rates may be a good deal.
- Do I want tax flexibility later? Having both pre-tax and Roth money lets you choose which bucket to pull from each year.
For many state employees, a mix is a sensible starting point. Your pension is already taxable income in retirement. Adding some tax-free Roth money can balance that out and keep your tax bill steadier.
Keep in mind that a good plan looks at your whole picture, not just one account. Your pension, Social Security, other savings, and health costs all play a part in your future tax bracket.
Frequently Asked Questions
What is a Roth DCP?
A Roth DCP is an after-tax option inside Washington’s Deferred Compensation Program. You pay income tax on your contributions up front. In return, your money can grow tax-free, and qualified withdrawals in retirement are not taxed.
Can I switch between pre-tax and Roth?
The idea behind the bill was to give you a choice. You could go pre-tax, Roth, or a mix of both. How and when you can change your election is set by the plan rules, so ask DRS for the latest details.
Are there income limits for a Roth DCP?
No. Unlike a Roth IRA, a Roth option in the DCP would have no income limits. High earners who cannot contribute to a Roth IRA directly would still be able to use it.
How much can I put into a Roth DCP?
The DCP limit is much higher than the Roth IRA limit. In 2022 it was $27,000 for people over 50, including catch-up money. The limit changes over time, so look up the current year’s number before you set your contribution.
Can I take a loan from my DCP?
At the time of the video, no. There were no loans, and you could only get your money once you separated from service. That is why the DCP works best as long-term retirement money.
What is an internal Roth conversion?
It is a move of money from the pre-tax side of a plan to the Roth side of the same plan. You pay tax on the amount you move. The bill did not say whether the DCP would allow this, so check the current plan rules.
Should I choose Roth or pre-tax?
It depends on your tax rate now compared with your tax rate in retirement. If you think your rate will be higher later, Roth tends to win. If you think it will be lower, pre-tax tends to win. Many people split the difference.
The Bottom Line
A Roth DCP would give Washington state employees something they have wanted for years: a choice about when to pay tax. No income limits and a high contribution cap make it a strong tool, especially for people who cannot use a Roth IRA.
The best choice depends on your own numbers. Look at your tax bracket today, think about your likely income in retirement, and lean toward a mix if you are not sure. Then confirm the latest rules with DRS before you act.
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