An Overview of the Florida Retirement System (FRS) Deferred Retirement Option Program (DROP)
If you’re a member of the Florida Pension Plan you have access to a unique retirement benefit that can kick-start your retirement in a positive direction: The Deferred Retirement Option Program (DROP).
First things first: check with the FRS to make sure you’re eligible because there are several requirements that need to be met, including Year of Service, Age, and Risk Class (each Risk Class will have its own requirements). You must also sign up during a specified enrollment window, outlined by your risk class.
So, what is the DROP?
The DROP is a voluntary program available exclusively to the Florida Pension Plan & Teachers Retirement System members. It allows you to defer pre-tax pension income into a separate retirement account for up to 5 years, while remaining employed during that period.
Essentially, you are both working and retired simultaneously, while your retirement pension checks are deposited into an account known as the FRS Trust Fund, earning a minimal tax-deferred interest rate. These funds are then made available to you upon completing the DROP plan. The longer you remain in the DROP, the higher the payout. After the 5-year period (or anytime during this timeframe of your choice) you are officially declared withdrawn, and your employment is completed.
What are the payout options?
- A direct lump-sum payout. FRS will withhold 20% for federal income taxes. Doing this could have considerable tax consequences beyond the withholding.
- Direct rollover to an eligible retirement plan. This is defined in section 401©(8)(b) of the internal revenue code. Examples of such plans include IRAs and Roth IRAs.
- Combination of a lump-sum payout and direct rollover into an eligible retirement plan.
Important considerations for each option:
OPTION A. Most select this option because they want to make some big purchases when entering retirement, such as buying a retirement home, new boat, cars, ect. The entire amount paid out in a direct lump-sum is treated as income. A big miscalculation is to assume that the 20% withheld from FRS will cover all the taxes; in most cases it does not. Taking such a large payout can easily put someone into the 32% plus tax bracket.
OPTION B. Rollovers to IRA’s and Roth IRA’s are usually the best option if you do not need the cash right away, or your purchases can be spread out over time. If you decide to rollover DROP funds into a Roth IRA, the FRS will not withhold the 20% for taxes, so it’s important to consider the tax consequences of such a strategy. Consulting a knowledgeable Florida financial advisor can be helpful.
OPTION C. This option mixes both of the first two and is a sweet spot for those who have some expenses that need to be addressed when entering retirement and would like the benefit of tax deferred growth.
For Retirement planning, this will be one of the biggest financial decisions a Florida state employee will make. It’s important to consult with professionals who have experience with the DROP plan. The payout options above are not one-size-fits-all and each one should be reviewed carefully, considering your personal goals, risk tolerance, and retirement income needs.