Retirement taxes FAQ
These are the tax questions we’re asked most often. Keep in mind you’ll need to work with a tax advisor if you have questions beyond the information we can provide. DRS and the investment record keeper Voya are not able to offer tax advice.
Will my monthly DRS pension payments be taxed?
Yes. Whether you are in Plan 1, 2 or 3, your retirement contributions are generally deducted from your before-tax salary. This means these amounts have not been federally taxed. When you withdraw these funds, you will pay federal income tax on the money you receive. When we issue payment, DRS withholds any required IRS federal income taxes for your distribution type.
Will Social Security taxes be withheld from my pension or DCP payments?
No. Since you pay Social Security taxes when you make pension and DCP contributions into those accounts, Social Security taxes will not be withheld from those payments when they are paid to you in retirement. Any benefits you expect to receive from Social Security will not be impacted by your pension or DCP income.
How do I change my pension withholding amount?
You can change your withholding amount by completing a W4P form. Use this form for periodic (monthly/annual) payments. You can send this to the DRS mailing address (Department of Retirement Systems, PO Box 48380, Olympia, WA 98504-8380).
View this short W4P Withholding video for tips on using the withholding calculator to estimate your tax withholding amount.
Will my Plan 3 investment withdrawals be subject to income tax?
Yes. You make these contributions before tax and you will owe federal income tax for these payments when you receive them. Depending on the type of withdrawal, we will withhold a percentage required by the federal government.
Sometimes customers ask whether their Plan 3 contributions can be made as Roth, or taxed contributions. The answer is no. Plan 3 is a governmental 401(a) hybrid plan with a pension and investment. The 401(a) does not allow taxed contributions. If you want to make Roth contributions, check out DCP.
Will my DCP withdrawals be subject to income tax?
If your contributions were pretax, yes. These withdrawals will have federal income tax. October 2023, DCP introduced a Roth option. With DCP Roth, you will pay the tax when you make the contribution. As long as you meet withdrawal requirements, DCP Roth withdrawals will be tax-free. The tax-free requirements include a five-year holding period from the year of your first contribution and a minimum age of 59½. If you withdraw before meeting these requirements, any investment earnings will be taxed. More about DCP.
What tax form will I receive in retirement?
While you are employed, you receive a form W-2 for tax season. After you retire, the form you receive is a 1099-R. You can download this form from your online account each tax season. You will also receive a copy in the mail, so it is important to keep your contact information up to date—even in retirement (update your address online or use this form). If you have DCP or Plan 3 investments in addition to a DRS plan pension, you will also receive a 1099-R form for any withdrawals you make from those accounts. You also might want to read this article about deductions in retirement, or listen to this podcast episode.
If I live in another state, will state income tax be withheld?
Washington does not have state income tax, and outside of DCP withdrawals, DRS does not withhold state income tax. If you live in a state with state income tax, you will be responsible for determining any additional taxes owed when you receive a withdrawal or monthly pension payment. As of March 2024, there are nine states that do not have state income tax: Washington, Texas, Florida, New Hampshire, Tennessee, Wyoming, Alaska, South Dakota and Nevada. If you aren’t sure where you will live when you retire, add this information to your retirement planning.
How can the Washington Deferred Compensation Program (DCP) help you save on taxes?
It depends on whether your DCP contributions are pretax or Roth. Pretax contributions lower your overall taxable income in the year you make the contributions. Roth contributions are taxed when you make them, but tax-free in retirement when you meet the minimum requirements. Find out more about the differences between the DCP options.
There is also something called the Federal Tax Savers credit where you can write off a portion of your annual DCP contributions if you qualify. Visit the IRS website to find out more about this credit.
If your employer doesn’t offer Washington’s DCP, find out what retirement savings options you do have, such as a 457 or 403b. Or look into opening a traditional or Roth IRA.
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The Office of the State Actuary prepared this example to assist DRS with developing a general educational resource.
