What Should I Do With My Plan 3 Money?

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What Should I Do With My TRS or PERS Plan 3 Money?

When it comes to managing the funds in your Plan 3 account, it’s essential to make informed decisions that align with your retirement goals. Whether you are actively employed, separated, or retired, understanding your options can save you stress, time, and money. Let’s explore your choices, key considerations, and strategies for making the most of your Plan 3 money.

Understanding Plan 3 and Accessing Your Money

Before diving into the options, let’s clarify the terminology and rules around accessing your Plan 3 funds.

What Is Plan 3?

Plan 3 is a hybrid retirement plan offered to Washington State employees, combining a defined benefit pension with an investment account. The investment account portion is self-directed, giving you some control over how your money is invested.

Separation vs. Retirement

One key distinction in managing your Plan 3 funds is the difference between separating service and retiring:

  • Separation means you are no longer employed by the state or your employer.
  • Retirement occurs when you start collecting your pension.

You can access your Plan 3 funds after separating service, even if you’re not officially retired.

Managing Your Plan 3 Money While Employed

If you’re still employed, your options with Plan 3 are limited. You can:

  • Reallocate Investments: Choose between the Washington State Investment Board (WSIB) fund or the self-directed options.
  • Switch Between Investment Tiers: Moving funds between WSIB and self-directed options can take up to 60 days due to specific rules, so plan ahead.

Options for Your Plan 3 Money After Separation

Once you separate from service, you gain more flexibility with your Plan 3 funds. Here are the most common options:

1. Leave It in Plan 3




  • Limited Investment Choices: You’re restricted to the options offered by the plan.
  • Withdrawal Delays: Withdrawing funds from WSIB can take up to 60 days due to processing and holding periods.
  • Action Step: If you choose to leave your money in Plan 3, consider transferring it to the self-directed tier before separating to avoid delays when you need access.

2. Roll Over to an IRA

Rolling over your Plan 3 funds to an Individual Retirement Account (IRA) is a popular choice. Benefits include:

  • Expanded Investment Options: IRAs allow investments in stocks, bonds, mutual funds, and ETFs.
  • Faster Access: IRAs typically offer quicker withdrawals than Plan 3.
  • Tax Efficiency: Pre-tax funds rolled into a traditional IRA avoid immediate taxation.

3. Purchase an Annuity

You can use your Plan 3 funds to purchase an annuity, either through the state or a private provider. The state’s TAP Annuity is particularly appealing due to its:

  • Higher Payout Rates: Offers better guaranteed income compared to private annuities.
  • Inflation Protection: Includes a 3% annual cost-of-living adjustment.

4. Withdraw as Cash

While it’s possible to withdraw your funds as a lump sum, this is rarely recommended due to the significant tax implications. Large withdrawals can:

  • Push you into a higher tax bracket.
  • Result in losing a significant portion of your savings to taxes.

Common Mistakes to Avoid with Plan 3 Money

Withdrawing All Funds at Once

Taking a lump sum withdrawal can trigger a substantial tax bill. Instead, consider spreading withdrawals over multiple years to stay in lower tax brackets.

Paying Off Low-Interest Debt

Using Plan 3 funds to pay off mortgages or other low-interest debts often results in high tax penalties, leaving you with less for retirement.

Gifting Large Sums Early in Retirement

While it’s natural to want to help loved ones, gifting large amounts early in retirement can deplete your savings and limit your future financial flexibility.

Maximizing the Benefits of Plan 3 Money

Consider Tax Strategies

Once your Plan 3 funds are in an IRA, you can explore strategies like Roth conversions or Qualified Charitable Distributions (QCDs) to minimize taxes and maximize your retirement income.

Balance Growth and Protection

Diversify your investments to balance growth potential with protection against market downturns. Consider indexed annuities for risk-averse strategies.

Use the Investment Decision Filter (IDF)

When making investment decisions, evaluate them using these four criteria:

  1. Fees: Are the fees reasonable?
  2. Performance: Does it align with your financial goals?
  3. Risk: Are you comfortable with the level of risk?
  4. Tax Impact: How will taxes affect your returns?

FAQ

1. Can I withdraw Plan 3 funds while still employed?
No, you can only access Plan 3 funds after separating service.

2. Is the TAP Annuity worth considering?
Yes, the TAP Annuity offers one of the highest guaranteed payouts, especially for those seeking lifetime income with inflation protection.

3. Are there fees for rolling over Plan 3 funds to an IRA?
Typically, there are no fees for a direct rollover to a traditional IRA, but you should verify with your IRA provider.

4. Can I invest Plan 3 funds in individual stocks?
Not directly within Plan 3, but rolling over to an IRA opens up this option.

5. How do I minimize taxes on Plan 3 withdrawals?
Consider spreading withdrawals over multiple years or using Roth conversions to manage tax impacts effectively.

P.S. Join our free community and gain exclusive access to expert financial insights, personalized tools, and step-by-step guidance tailored for Washington State employees. Whether you’re just starting out or nearing retirement, our community offers the resources you need to confidently plan your financial future. Connect with like-minded individuals, ask questions, and stay informed about the latest strategies to maximize your retirement benefits. Start your journey today and take control of your financial goals—it’s completely free!

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Join our free community and gain exclusive access to expert financial insights & personalized tools tailored for Washington State employees. Whether you’re just starting out or nearing retirement, our community offers the resources you need to confidently plan your financial future. Connect with like-minded individuals, ask questions, and stay informed about the latest strategies to maximize your retirement benefits. Start your journey today and take control of your financial goals—it’s completely free!

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