Taxes are known causes of headache, nausea and anxiety. But when you save with the Deferred Compensation Program (DCP) there are actual tax benefits that can cure your taxation woes. Well, at least a few of them!
Here’s how taxes affect your DCP savings:
DCP has a Roth and a pretax option. Each option affects when your retirement contributions will be taxed. Use this handy calculator to see which option is best for you.What is Roth? Your contributions are made after your income is taxed. When you take a withdrawal, the earnings associated with your Roth contributions will not be taxed if you meet the minimum qualifications. These qualifications 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 qualifications, your earnings will be taxed.
What is pretax? Your contributions are made before they are taxed. Withdrawals, including investment earnings, are taxed in the year you withdraw them. Every pretax dollar you contribute reduces your taxable income by a dollar. As a result, you’ll pay less in your current income taxes for the year because, in the eyes of the IRS, you’ve been paid less money. This can help reduce the impact on your overall take-home pay. You’ll pay taxes on the contributions and earnings in the year the money is distributed, which could mean a lower tax bracket during your working years.
Contributions to DCP will not impact your pension or Social Security benefits. That’s because only federal income tax is deferred, not pension contributions or Social Security tax.
The DCP – Deferred Compensation Program webpage has more tips and information about how saving with DCP has many advantages in addition to tax savings. If your employer doesn't offer DCP, find out what retirement savings options you do have. Or think about opening a traditional pretax or Roth IRA through a financial institution.
Overall tax considerations
DRS and the investment record keeper Voya are not able to offer tax advice. Please work with a tax adviser if you have questions beyond the general information we can provide.
Okay, disclaimer aside, here’s what we can tell you about your pension plan:
For most people, whether you are in Plan 1, 2 or 3, your retirement contributions are deducted from your salary before taxes. This means these amounts have not been taxed (same as the pretax option available for DCP). Plan 3 doesn’t have a Roth option because current IRS laws don’t allow it.
When you withdraw these funds, either as a withdrawal or in retirement, you will pay federal income tax on the money you receive.
When we issue payment, DRS withholds IRS federal income tax for your distribution type.
No matter what state you live in, we do not withhold state income tax. Good news is Washington is one of nine states that do not have a state income tax.
As of 2025, these are the states without an 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.
If you live in one of the other 41 states, you will be responsible for determining any additional taxes owed when you receive a withdrawal or monthly pension payment.
Tax tips
The biggest tool you have is planning. Make sure your withholding information is accurate. Even if you don't file your taxes until April each year, calculate them in January or February every year so you’ll know in advance whether you'll owe.
Did you get a refund this year? If you did, you overpaid your taxes and gave the government an interest-free loan. Think about the best way to use this year’s tax refund before you spend it on something you may want but don’t need. Use the refund to help build up your emergency savings, pay down debt, or get closer to achieving a personal savings goal. To help keep more of your money working for you throughout 2025 and beyond, consider increasing your contributions to DCP.
Did you owe money this year? You can help change that next year by reducing your taxable income. Saving to DCP on a pretax basis can help you do that as well. With pretax saving, you’ll reduce your current taxable income and may also save money on the taxes you will eventually pay.
It’s never too late to save for retirement or update your tax situation. Make this the year you take what you’ve learned to help improve your financial situation now and in the future.