Episode 16 – Options for those who only work a few years
Episode transcript:
[musical intro]
Jenny
Well, welcome back to Fund Your Future with DRS. And today we’re looking at a particular topic where we know that a lot of employees who work here may not work here their entire career. They may leave public employment and go to work for the private sector or start their own business. But then, of course, if you leave public employment, there is money that is left in your retirement account.
And so a lot of people ask about what are some of their options that they have to be able to do with that money that’s left in their retirement account. So we’re happy to have Nitia here today with us from the contact center who gets a lot of questions about these different options. And so welcome, Nitia. We’re happy to have you.
Nitia
Thank you. I’m happy to be here. Yeah.
Jenny
Great.
Seth
So, Nitia I know you get this question quite often, but let’s just say I’m a Plan 2 member. I’ve quit employment and I’ve worked for a year and I’ve got this little account balance. What are my options with my money? I put in my contributions while I was working. Now that account balance is sitting there and I don’t know what to do with it.
What options do I have as a Plan 2 member?
Nitia
So one of the options that you have is you can leave your contributions in your DRS account or your retirement account if you’re planning to come back to work, to state service and you leave your contributions in there, then your time will continue for the time that has already accumulated in your account. As far as service credit.
Seth
So I think what I hear you’re saying is I work for one year and then I take a break. I go take care of my child for a year or two, and then I come back to work and I left my money in the account. And so when I start working again, I’ll already have a year in the system if I leave my money there.
Is that what you said?
Nitia
That’s correct, yes. So let’s say you do have that year of service in which you were employed with that Washington state employer and you left eight service to go, for example, to take care of a child or go to another job, but then decided that you wanted to come back to state service. If you leave your contributions in that retirement account, when you come back, your state service will continue as if you did not leave.
So you will continue on from that one year and it goes to that one year to one month, one year to two months. So your service credit will continue on from the time that you already have in state service. Perfect.
Seth
So what other options do I have if I quit after a year?
Nitia
Yes. So if you stopped state service, you do have the options of withdrawing the contributions that you paid into your retirement system. You have the option of withdrawing them into a checking or savings account or receiving a check. Not only will you receive your contributions, but you will also receive any interest that has accrued from the contributions sitting in that retirement account.
You also have the option of rolling over those funds to an eligible IRA or a qualified retirement plan that you may have that will accept these funds. But just remember as a Plan 2 member, if you do decide to withdraw your contributions, then you’re also withdrawing that state service time that you had or that you had when you were employed.
So if you were employed for one year and you decide to withdraw your contributions, whether it’s to a checking savings account or rolling over those funds out of this account into another account, then that one year is gone. So you no longer have that one year of state service.
Seth
So in the example I gave earlier, I come back after taking care of my child and then I’m starting over from zero. I’m resetting that service credit.
Nitia
Even though you do withdraw your service credit, you do have the option of restoring the service credit back into your account by paying back those contributions and any interest earned from those contributions. And then once it’s paid in full, then those service credits can be restored. And I do want to add that please note, once you do return back to state service, there is a time limit for restoring back those service credits.
So you have five years from the date that you come back to state service to actually request that bill and pay those funds back. And let’s say that it goes past that five years. Then it’s what’s called basically an S pass in which you past that deadline date, you still will be able to restore that service credit by purchasing or paying back those contributions, but only it will be a greater amount because now you’re not only just restoring that service credit, but basically paying for the value of your retirement.
Seth
Yeah, that’s good. I know if you wait more than five years, it becomes much more expensive. So it’s highly encouraged that if you want to purchase that time back to do it within the five years of returning to employment. So, okay.
Jenny
But then of course, if I’m a Plan 2 member and I leave state service, I go start my own business. I can also choose to leave my funds in the account? Right? Until I’m 65?
Nitia
That’s correct. Yes. Depending on how much contributions you actually have in the system. If it’s under 1000, we’re going to automatically at some point pay that back out to you. But if your contributions are over a thousand, yes, you do have the option of keeping those contributions in that account. And as I stated before, they do accrue interest as they’re sitting in there.
The interest rate does change. Right now. We’re currently at a 2.75% annual rate and it’s compounded quarterly. But then once you choose to withdraw, if you choose to withdraw, then we do also add that daily interest of whatever has already accumulated. But the answer to your question is yes, you can keep them in there until the age of 65, actually until the age of 72.
Now 73 for 2023. Depends on how the IRS sets their point. But there will be a certain age limit that you do have to withdraw your funds. Only because there is a required minimum distribution of funds that have to be distributed to you by a certain age. Because remember, when these funds went in, they weren’t taxed. As you’re paying your contributions, they’re coming out of your paycheck, and that’s before taxes.
And at some point the IRS is going to want their money. So they’re going to want to tax you at some point. So there is a required age in which you do have to withdraw these.
Seth
Yeah. You know, I realized as we were talking and listening to Nitia that we probably didn’t do a great job of introducing why this is important. Because for folks in Plan 2 and really for, for folks in Plan 3 as well, to be eligible for a pension benefit, you have to reach a certain number of years. And so what we’re talking about is folks who are under that threshold, we call it vesting.
You have to have at least five years of service to be eligible for a pension. So for folks who work less than that amount of time, they might have some questions about: “what am I going to do with this money? Should I leave it there or should I take it out?” and I think we know, especially younger people tend to move jobs more frequently.
So that’s sort of an open question of, “well, maybe I’m going to come back to public employment, maybe I’m not.” And so we want to have this conversation so people can think about what those options are.
Jenny
Yeah. So if I am a Plan 3 member and we already have an episode about how — you know — Plan 2 and Plan 3 is a little bit different. But if I’m a Plan 3 member, what are some of the things that I should consider about my retirement contributions if I’m leaving state service?
Nitia
So with the Plan 3, you have two parts to your retirement, the investment portion or your contributions that you placed in there, they’re not tied to your service credit. So when you leave state service as a Plan 3 member, you have the same options of withdrawing those contributions, whether it’s to a check in a savings account, check paid to you.
You also have the option of rolling those over into an eligible account, such as an IRA or another qualified retirement plan that will accept those funds. But remember that these are not tied to the service credit. So you can do what you want with these funds. You can keep them in there and which they do fluctuate with the market, but you will still have a return on investments for the funds that are in there, whether you choose to withdraw some of it and leave the rest in there, they’ll continue to have return on investments or you choose to pay yourself a monthly, quarterly or annually until those funds have been exhausted.
They’re not tied to your service credit. And those contributions are all yours. Yes. When I say that they’re not tied to your service credit, that means once you withdraw your contributions, whether it’s all or some of them, you’ll still have those service credits. So even when you return or if you return back to the state service, then just as it was in Plan 2, for those that did not withdraw your state service will continue on from the time that you left and all began accumulating from wherever you left off at.
Seth
Nitia, I’m going to ask you a trick question, not a trick question, but something we didn’t prepare on. I think. I think it’ll be totally in your wheelhouse though. Because I know one of the questions people often ask when they’re considering taking their money out is, “Well, what about all the money my employer paid in while I was working?”
What? What happens to that money? Yeah. Can you just tell us a little bit about those funds?
Nitia
Yes. So any funds that you contributed, you will always see in your account because you are entitled to what you paid in. The employer’s contributions, they’re not in the name of the member or any certain individual. When an employer pays contributions, they’re actually paying one a greater percentage than you are as a member. But also those are going into a pension fund for Washington State.
So the only time that you reap the benefits of the employer’s contributions is when you become eligible to get a retirement pension and we start paying you a monthly pension for your lifetime. Because, remember, your pension is not based off the contributions that you put in. It’s based off your service credit and then the average of your earnings.
So since your contributions aren’t tied to your pension, the employer’s contributions you do not get unless you actually start receiving a pension.
Jenny
Yeah, that’s a really good point.
Seth
Yeah, I think a lot of people think about 401K plans where there’s a match and something like that. And so so it just seems like, “oh, that money should be part of my account.” But, but that’s, that’s not the way our plans are set up as Nitia is saying. Those funds are really there to pay the future pension benefits of you or whoever else is going to be eligible to earn those benefits.
Nitia
Correct. Yeah. Just remember that this is a 401(a) and like Plan 2, you have your contributions and if you do end up getting a pension from us or your contributions actually pay out your retirement and that usually lasts about two or three years. And then that’s when the employer’s contributions take over. So that’s when you reap the benefit from the employer’s contributions.
And for Plan 3 , the employer’s contributions — the reason that you can’t see them — is because that is what actually pays for your benefit. One more thing for the Plan 3, for those that actually leave state service and another option that you can do with the contributions, if the contributions within the Plan 3 account have over $25,000, then you can purchase what is called a TAP annuity and this can be purchased at any time.
I’m pretty sure you’ve been over this in previous podcasts, but that’s another thing. You do not have to be eligible for a retirement pension in order to purchase what’s called a TAP annuity with your Plan 3 funds if you have over $25,000 in that account.
Seth
That’s great. We’re going to do another episode on annuities. You know, there’s so many questions about it, and I think it’s such a good topic for people to think about because you build up these account balances sometimes, you know, tens of thousands or hundreds of thousands of dollars and then you don’t know what to do with them and how can you turn them into a check, an ongoing payment stream.
So yeah, we’re going to do a whole…well, probably a couple of episodes on that sort of topic.
Jenny
Okay. One of our other questions is: If people have money in a former retirement account like a 401(k), what might they do?
Nitia
Yes. So if you do have funds or non-tax funds within a 401(k), unfortunately you cannot add those funds into your Plan 2 or Plan 3 account because remember, all those contributions do come from untaxed funds from your paycheck. But, you can enroll into an optional program that is the Deferred Compensation Program or DCP, that is a 457 in which you can rollover funds from…. or non-taxed funds, for now, from a 401(k) or another eligible account into your DCP.
So that when you go to separate from employment, then those funds can be withdrawn as needed.
Seth
Yeah, I think a lot of people look to consolidate retirement funds when they move jobs. It’s like we’ve been talking about…. you leave public employment, you want to move these funds into another retirement account, it’s the same thing when you’re coming into public employment. You might be looking for options on how to consolidate funds and you can’t put those funds into Plan 2 or 3.
But there are other options through your employer, other optional retirement savings plans like DCP. We’re big fans of DCP. We probably talk about it every episode. Nitia, is there anything else that somebody should think about when they’re leaving public employment and aren’t yet eligible to collect a pension benefit?
Nitia
Yes. So just remember by withdrawing your contributions, I know most people want their funds and they want them now. One thing to consider when you are thinking about or wanting to withdraw your contributions, these funds cannot be paid out to you until you’re totally separated from employment. And normally when we say separated from employment, that means that your employer most likely has already paid you off your last paycheck.
Yeah, and they have closed their books. That’s when they submit what’s called a separation date. So the date that you separated electronically in their system, it will then communicate over to our system, letting us know that you’re no longer tied to that employer. And then that’s when your funds can be distributed out to you.
Seth
That’s a really good point. And one thing I also want to make sure we emphasize is that everybody’s going to try to make the best decision for themselves. And you know, we certainly don’t have any judgment or concern. For some people, rolling out their funds or taking a withdrawal is the absolute right thing for them to do. And we, we want to make it very clear we’re not providing financial advice, but we want to make sure people are aware of what their options are and consider those things.
And it’s very normal, as Nitia, you said, for people to have regrets about what they did when they were 25, when they’re 55 now. Thinking about that, just have to make the best decisions you can going forward.
Nitia
So that’s correct. So if you ever have any questions or you’re wondering what to do, like we said, we don’t offer advice or we don’t offer suggestions, but if you do call into the contact center, we will let you know all of your options so that you can make that informed decision.
Jenny
That’s really awesome.
Seth
Yeah, that’s great. Well, thanks for joining us Nitia.
Jenny
Yeah, we appreciate your insight.
Nitia
Well, I thank you for having me.
Jenny
Thank you very much.
[music outro]
Disclaimer
Thanks for listening. And now we’d love to hear from you. What topics would you like to hear about? What questions do you have for us? Send an email to drs.podcasts@drs.wa.gov that’s drs.podcasts@drs.wa.gov. The Department of Retirement Systems provides this podcast as a public service, but it’s neither a legal interpretation nor a statement of DRS policy.
References to any specific product or entity do not constitute an endorsement or recommendation. The views expressed by guests are their own, and their appearance on the program does not imply an endorsement of them or any and entity they represent. Views and opinions expressed by DRS employees are those of the employees and do not necessarily reflect the view of DRS or any of its officials.
