Over the years, a lot of teachers have asked me the same question: “If you were in my shoes, what would you do?” It’s a fair question. Advice is easier to follow when you can picture someone actually doing it.
So in this post I’m going to answer it for TRS Plan 2. Picture a brand-new teacher starting a career in Washington today. Here is the plan I would follow, step by step, if that teacher were me. Most of it also applies if you are further along in your career, and I’ll point out where things change.
The short version has four parts. Understand your pension. Open a savings account next to it. Pick the right tax treatment for that savings. And take a hard look at the high deductible health plan with an HSA. Let’s go through each one.
Step 1: Understand what TRS Plan 2 gives you (and what it doesn’t)
The first thing I would do is learn how Plan 2 actually works. I have a separate video on the channel that walks through the Plan 2 formula, so I won’t repeat all of it here. But there is one fact every Plan 2 member needs to know.
Plan 2 is a great benefit, but there is no savings account attached to it. Plan 3 members get a pension plus an investment account. Plan 2 members get a pension, and that’s it.
Think of it like a water faucet with no bucket underneath. The faucet runs every month in retirement, and that’s wonderful. But if your car breaks down or the roof starts leaking, there is no bucket of extra water to scoop from. You only have what comes out of the faucet that month.
That means you could work a full career, retire with a nice monthly check, and still end up living paycheck to paycheck in retirement. The only fix is to build your own bucket. And nobody builds it for you. You have to know it’s missing, and then you have to go open the account and set up the contributions yourself.
Step 2: Open a retirement savings account right away
So the second thing I would do is open a savings account. As a teacher, you have a few choices through your job and outside of it:
- The DCP, Washington’s Deferred Compensation Program, run by the state.
- A 403(b) through your school district.
- An IRA or Roth IRA that you open on your own at a brokerage.
The DCP and the 403(b) both come straight out of your paycheck, which makes saving automatic. You set it once and the money moves before you ever see it. For most people, that is the easiest way to stay consistent.
If you want the most bang for your buck, though, you also want to save in a way that is tax efficient. That’s where the choice between pre-tax and Roth comes in.
Step 3: Choose pre-tax or Roth on purpose
Every dollar you save will be taxed one time. The question is when. With a pre-tax account, you skip the tax today and pay it later when you take the money out in retirement. With a Roth account, you pay the tax today, and the money comes out tax-free later, growth included.
Here is a simple way to think about it. Imagine you are a farmer. You can pay tax on the seed you plant, or you can pay tax on the whole harvest. If the harvest is going to be big, paying tax on the seed is usually the better deal.
The first step here is to have someone look at your situation and help you figure out where you’re likely to be tax-wise in the future. Then they can give you a better idea of which account makes sense. Nobody has a crystal ball, and we don’t know exactly what tax rates will be decades from now. But we can plan with what we know today.
What I would do as a new teacher
If I were a new teacher, I would probably save on the Roth side. Here’s why. The way the teacher pay scale works, you earn more as you gain years and education credits. More pay later usually means a higher tax bracket later.
So early in your career is often the cheapest time you will ever have to pay tax on your savings. I would take advantage of that lower bracket now, pay the tax on the money now, and let it grow tax-free in a Roth.
A quick update on the tax side: when I recorded this video in 2022, the lower tax brackets from the 2017 tax law were set to expire after 2025, which made Roth saving look even better. In 2025 Congress made those brackets permanent, so that deadline is gone. The pay scale argument still holds, though. A new teacher in a low bracket will often be in a higher one later.
A worked example: $200 a month in a Roth
Let’s put numbers on it. Say a first-year teacher puts $200 a month into a Roth 403(b) or Roth DCP for 30 years. We’ll assume a 7% average yearly return. That is just an assumption for the example, not a promise, and real returns go up and down.
| Item | Amount |
|---|---|
| Monthly savings | $200 |
| Years of saving | 30 |
| Total put in | $72,000 |
| Estimated balance at 7% | About $244,000 |
| Growth on top of what you put in | About $172,000 |
| Tax owed on withdrawals (Roth) | $0 |
| Tax owed if the same balance were pre-tax, taxed at 22% | About $53,700 |
With the Roth, the teacher paid tax on the $72,000 of “seed” along the way, while in a low bracket. The $172,000 of “harvest” comes out tax-free. If that same balance were pre-tax and came out at a 22% rate in retirement, the tax bill would be about $53,700. That’s the trade you are weighing.
What I would do later in my career
If I were further along on Plan 2, I would again start by looking at taxes. I’d check what I already have set up. If all of my savings were pre-tax, I would think about adding Roth money too. That gives you tax diversification, meaning you have more than one kind of bucket to pull from in retirement and more control over your tax bill each year.
Some people earn too much to put money into a Roth IRA directly, because Roth IRAs have income limits. If that were me, I would come back to my employer plans and use the Roth option in the DCP or the 403(b). Those workplace Roth accounts don’t have the same income limits, so you can contribute no matter what you earn.
Here is the big picture. If you are on Plan 2 and you are diligent about putting money away, the pension plus a healthy amount of savings sets you up for a great retirement. The pension handles the base, and your savings handles everything else.
Step 4: Know your income options if you need more in retirement
Most Plan 2 members don’t need a lot of extra income in retirement, because the pension does a lot of the heavy lifting. But some do. Maybe you started teaching later in life, or you want more cushion. That’s when the state’s annuity options come into play.
One thing to clear up first: Plan 2 members are not eligible for the TAP annuity. TAP is only for Plan 3 members. So as a Plan 2 member, your state options are these two:
- Purchase service credit from the state, which adds to the years used in your pension formula.
- Buy the retirement system’s own annuity, like the TRS annuity for teachers or the PERS annuity for PERS members. Each retirement system has its own annuity with its own payout factors.
Honestly, the cost of either option is about the same. Which one pays out more depends on your situation and how many years of service you have. That’s worth running the numbers on before you retire.
Outside of the state options, you could buy an annuity from a private insurance company. Or you could leave everything invested and build a portfolio that generates income for you. Those are the remaining choices.
Why I’d lean toward the TRS annuity
Personally, if I were on Plan 2 and needed more income, I would strongly consider the state’s plan annuity, so the TRS annuity or the PERS annuity. There are three reasons. It is a guaranteed income stream. Its payout factors are higher than what you usually find in the private market. And it comes with a cost of living adjustment.
That cost of living adjustment isn’t guaranteed to be a set amount. It works the same as the Plan 2 pension adjustment. It can be anywhere from zero to 3% in a given year, depending on inflation.
Here’s the catch, and it brings us right back to Step 2. You buy the annuity with your retirement savings. If you never saved anything on Plan 2, you have no money to buy the annuity with. That’s one more reason to save even though you have a pension. Set up an account, whether that’s the DCP or something else, and put money aside for the future.
Step 5: Look hard at the high deductible health plan and HSA
The next thing I would do is about health care. I would strongly consider the UMP high deductible health plan. Don’t let the words “high deductible” scare you off.
High deductible means that if you need care, you pay more out of your own pocket before the insurance kicks in. In exchange, these plans usually have lower premiums. And they are the plans that come with an HSA, a health savings account.
The numbers from the video
When I recorded this video, single coverage on the UMP high deductible plan cost $300 a year. It came with an HSA, and the state put $375 a year into that HSA for you. Rates and state deposits change, so check the current PEBB or SEBB numbers at open enrollment. But here is how those numbers played out:
| Item | Per year | Over 10 healthy years |
|---|---|---|
| Premium you pay | $300 | $3,000 |
| State deposit into your HSA | $375 | $3,750 |
| Net to you before any medical bills | +$75 | +$750 |
So if I’m healthy, I pay my $300 a year, no other bills come up, and I have $375 sitting in an HSA for future medical costs. The state is basically paying me to have health insurance. If I don’t need the money, it stays there, and it can actually be invested and grow.
You can add your own money to the HSA too, and every dollar you add is a tax deduction. That is a crazy good benefit, and a lot of people don’t realize they have it. If you want a full cost comparison of the UMP plans, including what the state puts in the HSA versus what you pay, there’s a link in the video description. A special shout out to Kathy Sands, a teacher in Pasco, who put that document together and shared it so we could pass it on to the community.
One caution: this works best if you are fairly healthy and don’t have many health care bills. If you or your family see the doctor a lot, a plan with a lower deductible might cost less overall. Run your own numbers.
Your TRS Plan 2 action items
Here is the whole plan in order. If you are on Plan 2, this is your checklist:
- Understand what your Plan 2 benefit is and how it works.
- Have someone look at your taxes and help you decide between pre-tax and Roth savings.
- Start saving. Even if you skip the tax analysis (which could save you a lot of money), get some money set up somewhere so your retirement account starts growing.
- Look at the high deductible plan with an HSA at your next open enrollment, especially if you are fairly healthy.
If you’d like help working through the tax side or comparing the annuity and service credit options for your own numbers, you can schedule a personal meeting with me here.
Frequently Asked Questions
Does TRS Plan 2 come with a savings account?
No. TRS Plan 2 is a pension only. Plan 3 includes an investment account, but Plan 2 does not. If you want savings to draw on in retirement, you need to open a DCP, 403(b), or IRA and fund it yourself.
Should a new teacher on Plan 2 use Roth or pre-tax?
It depends on your situation, but many new teachers lean toward Roth. Your pay is usually at its lowest early in your career, so your tax bracket is usually lower too. Paying tax now, at a low rate, lets the money grow and come out tax-free later. Have someone look at your taxes to confirm.
I earn too much for a Roth IRA. Can I still save in a Roth?
Yes. The Roth options inside the DCP and your district’s 403(b) don’t have the income limits that Roth IRAs have. You can contribute to them no matter what you earn.
Can Plan 2 members buy the TAP annuity?
No. The TAP annuity is only for Plan 3 members. Plan 2 members can purchase service credit or buy their retirement system’s annuity, such as the TRS annuity or PERS annuity. They can also look at private annuities or build an income portfolio.
Does the TRS annuity have a cost of living adjustment?
Yes. It works the same way as the Plan 2 pension adjustment. It is not a fixed amount and can be anywhere from 0% to 3% in a given year, depending on inflation.
Is the high deductible plan a good idea for teachers?
It can be, especially if you are healthy and rarely need care. You pay lower premiums, and the state deposits money into your HSA. Money you add yourself is tax-deductible, and unused money can be invested. If you have a lot of medical bills, compare the total cost against a lower deductible plan first.
Remember, your future depends on what you do today. Thanks for reading, and I’ll see you next week.
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.
