The Washington State Employee's Guide to Tax-Smart Retirement Withdrawals

Maria, a 58-year-old Washington State Department of Transportation supervisor, has diligently saved $400,000 across her 457(b) and Roth IRA accounts. Her husband Tom works in the private sector with his own 401(k) worth $300,000 and will retire around the same time. With retirement just three years away, they're facing a common concern:
"We've done great at saving, but how do we withdraw this money without getting crushed by taxes?"
If you're a Washington State public employee approaching retirement, you're in a unique position. Unlike most retirees, you won't pay state income tax on your withdrawals¹.
However, federal taxes can still take a significant bite out of your nest egg if you're not strategic about your withdrawal approach.
Core Tax-Smart Withdrawal Principles
Understanding these fundamental principles will help you keep more of your hard-earned money:
1. Leverage Tax Diversification Having money in different tax buckets (traditional, Roth, and taxable accounts) gives you flexibility to manage your tax bracket each year².
2. Fill Your Tax Brackets Strategically Rather than withdrawing randomly, intentionally "fill up" lower tax brackets before moving to higher ones³.
3. Take Advantage of Washington's Tax-Free Status Since Washington has no state income tax, focus entirely on federal tax optimization without worrying about state tax complications⁴.
4. Consider Required Minimum Distributions (RMDs) Plan ahead for RMDs starting at age 73, which can push you into higher tax brackets if not managed properly⁵.
5. Coordinate All Income Sources Your DRS pension, Social Security, and investment withdrawals should work together as part of a comprehensive tax strategy.
Your Tax-Smart Withdrawal Strategy
Step 1: Create Your Annual Income Blueprint
Start by mapping out all your income sources for each year of retirement. This includes your DRS pension, Social Security (when you claim it), and any part-time work income.
Let's follow Maria and Tom through this process. Maria receives $48,000 annually from her PERS 2 pension when she retires at 65. Tom plans to claim Social Security at 65 for $24,000 per year (reduced from full retirement age), and Maria will claim hers for $22,000 at the same age. Together, they need an additional $25,000 annually from their combined retirement savings to maintain their lifestyle.
Key considerations:

• Calculate your total income needs minus guaranteed income sources (like Maria's $48,000 PERS 2 pension)
• Identify the gap that investment withdrawals must fill (Maria and Tom need $25,000 annually starting at retirement)
• Plan for inflation adjustments over time

Step 2: Optimize Your Tax Bracket Management
The goal is to stay within favorable tax brackets while meeting your income needs. For 2025, the 12% federal tax bracket extends to $96,950 (taxable income) for married couples filing jointly⁶.
Maria and Tom both claim Social Security at 65, receiving reduced benefits but providing immediate income. Since they're claiming at 65 instead of waiting until their full retirement age of 67, their combined Social Security is $46,000 instead of the potential $53,000 they would receive at full retirement age. Claiming at 65 results in approximately a 15% reduction from their full retirement age benefits. However, this early claiming strategy reduces their need to withdraw from retirement accounts during those early retirement years.
Strategic approaches:

• Use Roth withdrawals when you're in higher tax brackets
• Fill lower brackets with traditional account withdrawals
• Consider tax-loss harvesting in taxable accounts

Step 3: Implement the "Bucket Strategy"
Organize your withdrawals by creating three distinct buckets based on tax treatment:
Bucket 1 - Tax-Free (Roth accounts) Use these when you're in higher tax brackets or need extra cash without tax consequences. Maria uses her Roth IRA strategically to avoid pushing their household into higher brackets.
Bucket 2 - Tax-Deferred (457(b), 401(k), traditional IRAs) Withdraw from these to "fill up" lower tax brackets efficiently. Both Maria's 457(b) and Tom's 401(k) fall into this category.
Bucket 3 - Taxable Accounts These offer flexibility with capital gains treatment and can provide tax-efficient income through strategic selling. Maria and Tom's joint investment account provides this flexibility.
Step 4: Time Your Social Security Claiming
Your Social Security claiming strategy directly impacts your withdrawal needs and tax situation. Delaying Social Security can reduce the amount you need to withdraw from retirement accounts.
Maria and Tom both claim Social Security at 65, receiving reduced benefits but providing immediate income. Since they're claiming at 65 instead of waiting until their full retirement age of 67, their combined Social Security is $46,000 instead of the potential $53,000 they would receive at full retirement age. However, this early claiming strategy reduces their need to withdraw from retirement accounts during those early retirement years.
Consider these factors:

• Break-even analysis for early claiming versus delayed claiming
• Impact on overall tax bracket when combining pension and Social Security income
• Coordination with PERS 2 pension timing and withdrawal strategy

Step 5: Plan for Required Minimum Distributions
Starting at age 73, you'll be required to withdraw minimum amounts from traditional retirement accounts. These RMDs can significantly impact your tax situation if not planned for properly. The RMD age is increasing to 75 over time.
Planning strategies:

• Consider Roth conversions before turning on Social Security and consider delaying your pension just 1 year if possible to create a no or low income year resulting in an ideal time to do Roth conversions.
• Spend down traditional accounts strategically before RMDs begin at 73
• Use qualified charitable distributions if you're charitably inclined

Maria and Tom's Complete Strategy
Now let's see how all these strategies come together in their comprehensive retirement plan:
Their Situation:

• Maria's 457(b) traditional: $350,000
• Maria's Roth IRA: $50,000
• Tom's 401(k): $300,000
• Combined taxable investments: $75,000

Income Timeline:

• Age 65+: Maria's PERS 2 pension ($48,000) + Social Security ($46,000 combined) + investment withdrawals ($25,000) = $119,000 total

Their Withdrawal Strategy:
Phase 1 (Ages 65-73): With $94,000 in pension and Social Security income, Maria and Tom need $25,000 annually from investments. They withdraw $15,000 from traditional accounts (split between Maria's 457(b) and Tom's 401(k)) to stay in favorable tax brackets, plus $10,000 from Maria's Roth IRA.
Phase 2 (Ages 65-72): During this period, Maria and Tom strategically convert $10,000 annually from traditional accounts to Roth accounts while managing their overall tax bracket.
Phase 3 (Age 73+): RMDs begin, but Maria and Tom's earlier strategic planning has positioned them well. They continue coordinating withdrawals between all account types to manage their tax bracket effectively.
This coordinated approach minimizes Maria and Tom's lifetime tax burden while ensuring steady income throughout retirement, taking advantage of both Maria's public sector benefits and Tom's private sector savings.
Remember, every situation is unique. While these strategies provide a solid foundation, your specific circumstances may require adjustments to optimize your tax situation.

​Sources and Resources

1. Washington State Department of Revenue - Retirement Income
2. IRS Publication 590-B - Distributions from Individual Retirement Arrangements
3. Department of Retirement Systems - Planning Your Retirement
4. Social Security Administration - Retirement Benefits
5. IRS - Retirement Plan and IRA Required Minimum Distributions FAQs

-Seth Deal