If you work for a Washington school district, you already have two pensions to think about: Plan 2 and Plan 3. Most people never get a plain-English walkthrough of how either one actually works, what else they should be saving in, or the tax trap that catches almost everyone by surprise. This guide walks through all four topics from our recent webinar for school district employees, in plain language.
How Your Pension Actually Works: Plan 2 vs. Plan 3
School district employees in Washington fall into Plan 2 or Plan 3, depending on which one they picked (or were placed into) when they were hired. Both plans use the same basic building blocks, but the math works out very differently.
Plan 2: The Traditional Pension
Plan 2 pays you 2% for every year you worked, multiplied by the average of your five highest-earning years, not necessarily your last five. That average counts all your income, including stipends for coaching or National Board certification, not just your base salary.
There is no cap on how many years count. Work 30 years and you get 60%. Work 35 and you get 70%. You can start collecting your full benefit at 62 if you have 30 years of service, or at 65 if you have less than that. If you were hired after May 1, 2013, your full benefit age is 65 no matter how many years you worked.
Plan 2 also comes with an annual cost-of-living adjustment, decided each July, and four survivorship options that let a spouse keep receiving part of your pension after you pass away. Choosing a survivorship option lowers your monthly check a bit while you’re alive, in exchange for that protection.
Plan 3: A Pension Plus Your Own Investment Account
Plan 3 splits your retirement into two pieces. The first piece is a smaller pension, just like Plan 2 but at 1% per year instead of 2%. Everything else about that piece works the same: same top-five-year averaging, same retirement ages, same cost-of-living adjustment.
The second piece is a defined contribution account, meaning it behaves like an investment account rather than a promised check. Instead of paying into the pension, you contribute somewhere between 5% and 15% of your income (a rate you pick when you’re hired, and can only change if you switch school districts) into an account that rises and falls with the market.
That money is completely off-limits while you’re still employed, no loans, no hardship withdrawals, no matter your age. Once you leave your school district, you get full access to it, and you can roll it into an IRA or another account of your choosing.
Here’s what the pension side of each plan looks like for someone with 30 years of service and a five-year average salary of $70,000:
| Plan 2 | Plan 3 | |
|---|---|---|
| Formula | 2% × years worked | 1% × years worked |
| Percentage at 30 years | 60% | 30% |
| Annual pension | $42,000 | $21,000 |
| Plus a personal investment account? | No | Yes, funded by your own contributions |
Neither plan is automatically “better.” Plan 2 gives you a bigger guaranteed check. Plan 3 gives you a smaller guaranteed check plus an account you control, which can grow larger or smaller depending on how it’s invested and how the market performs.
Four Ways to Save Beyond Your Pension
Your pension was never meant to fully replace your paycheck. That gap between what your pension pays and what you actually spend is called your shortfall, and closing it is what these four accounts are for.
Deferred Compensation (DCP)
DCP invests in the same funds as the Plan 3 investment account, so think of it as “more of the same, but optional.” You can start, stop, or change your contribution any month, there are no income limits, and contributions are pre-tax. The one perk worth knowing: DCP withdrawals never carry the usual 10% early withdrawal penalty, even if you retire before 55.
Roth IRA
A Roth IRA is a private account, not tied to your employer, that you fund with after-tax dollars. In exchange, all future growth comes out completely tax-free. You can withdraw your own contributions at any time without penalty, though growth generally needs to wait until age 59 and a half. Roth IRAs do have income limits, so high earners may not qualify to contribute directly, and the yearly contribution limit is lower than the other accounts here.
403(b)
A 403(b), sometimes called a TSA, is your school district’s version of a 401(k). You can adjust your contribution whenever you like by filling out a form with payroll, and there are no income limits. Unlike DCP and the Plan 3 account, a 403(b) gives you access to your money at 55 even if you’re still working, or 59 and a half if you’re at a different district than the one that opened the account. Before that age, you can tap it through a loan (which you pay back to yourself, interest included) or a hardship withdrawal.
Roth 403(b)
This is simply a 403(b) funded with after-tax dollars instead of pre-tax ones. You get the same higher contribution limit as a regular 403(b), but with the Roth IRA’s tax-free growth, and none of the Roth IRA’s income restrictions. For many school district employees, this ends up being the account they lean on the most.
| Account | Tax treatment | Income limits? | Access while still employed? |
|---|---|---|---|
| DCP | Pre-tax | None | No |
| Roth IRA | After-tax, tax-free growth | Yes | Contributions yes, growth at 59½ |
| 403(b) | Pre-tax | None | Yes, at 55 or 59½ |
| Roth 403(b) | After-tax, tax-free growth | None | Yes, at 55 or 59½ |
Contribution limits on DCP and 403(b) accounts rise most years to keep up with inflation, and there’s a higher limit once you turn 50. Check the current-year numbers with your plan provider or the DRS website before you set your contribution rate.
The One Investing Mistake That Quietly Costs You the Most
Not all 403(b) accounts are built the same way, and picking the wrong kind can cost you tens of thousands of dollars over a career without you ever noticing.
There are two types. An annuity-based 403(b), issued by an insurance company, usually comes with a surrender schedule, meaning your money is locked in for a set number of years, and every new contribution can start its own lock-in clock. These typically charge total fees between 2% and 3% a year, and a “no-fee” or “guaranteed” pitch almost always means the insurer caps your gains or offers a very low guaranteed rate in exchange.
An investment-based 403(b), usually offered through a financial firm rather than an insurance company, has no surrender charges and a much wider menu of funds to choose from. Fees typically run between 1.5% and 2.5% a year, covering the fund expenses, the firm, and your advisor.
Fees matter because they compound right alongside your gains. Here’s what a $300,000 account earning 5% a year looks like over 15 years, with and without a 2% annual fee:
| Scenario | Value after 15 years |
|---|---|
| No fees | $623,000 |
| With a 2% annual fee | $460,000 |
| Difference | About $163,000 |
That doesn’t mean the cheapest option is always the right one. A 0% fee account with no professional guidance can lead to expensive mistakes of its own, like missing a required withdrawal, drawing accounts down in the wrong order, or picking investments that don’t match how close you are to retirement. What matters is knowing what you’re paying for, and whether someone is actually helping you avoid those bigger, costlier mistakes.
The Tax Trap Almost Everyone Falls Into
Every dollar you put into a pre-tax account, your DCP, your traditional 403(b), or the Plan 3 investment account, gets taxed later, including any growth. Roth accounts flip that: you pay tax today, and everything that comes out later, including decades of growth, is tax-free.
The trap shows up at age 72, when the IRS forces you to start taking Required Minimum Distributions, or RMDs, from pre-tax accounts. You have to withdraw a certain amount every year whether you need the money or not, the required amount grows each year, and skipping it triggers one of the harshest penalties in the entire tax code. Roth accounts never require this.
It gets worse for your family. If you leave a pre-tax account to your kids, they generally have to empty it within 10 years and pay income tax on every dollar as it comes out. A $300,000 inherited pre-tax account works out to roughly $30,000 a year of extra taxable income for your beneficiary, often stacking right on top of their own salary and pushing them into a higher tax bracket.
None of this means pre-tax saving is a mistake. It usually means a bigger deduction while you’re working, which has real value. It just means the decision deserves a second look well before age 72, since a Roth conversion done gradually, over several years, can shrink or avoid that tax bill entirely. Every household’s numbers are different, so if you’d like help mapping out your own pre-tax versus Roth mix, you can schedule a personal meeting with our team.
Frequently Asked Questions
1. Is Plan 2 or Plan 3 better for school district employees?
Neither is universally better. Plan 2 pays a bigger guaranteed pension. Plan 3 pays a smaller guaranteed pension plus an investment account you control, which could end up larger or smaller depending on how it’s invested. Most school districts only let you choose once, at hire, so if you’re unsure which one you’re in, your DRS account will show you.
2. What counts toward my five highest years for the pension formula?
All reported income counts, not just your base salary. Coaching stipends, National Board certification pay, and extra duty pay from any Washington school district all get included when DRS calculates your top five years.
3. Can I retire before age 62 or 65?
Yes, but drawing your pension before your full retirement age usually comes with a reduction. If you have at least 30 years of service, that reduction is smaller, and some employees end up ahead financially by starting benefits at 60 or 61 instead of waiting.
4. What’s the difference between a 403(b) loan and a hardship withdrawal?
A loan is money you borrow from your own account and pay back, with interest, over up to five years, and that interest goes back into your own account. A hardship withdrawal is money you take out permanently for a qualifying reason, like medical bills, and it’s taxable and not repaid.
5. Do Roth accounts ever have required withdrawals?
A Roth IRA never does. A Roth 403(b) technically does under the rules, but since it’s just a Roth account wrapped in a 403(b) shell, most people avoid the issue entirely by rolling it into a Roth IRA before age 72.
6. How do I know which type of 403(b) I have?
Check whether your provider is an insurance company or a financial firm, and ask directly whether your account has a surrender schedule. If you’re not sure, pulling your account statement or asking your provider these two questions will clear it up quickly.
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.
