What Exactly Is A DROP Plan?

If you’re a First Responder or Teacher, the opportunity for retirement may be earlier for you than those in other professions. It’s a well-deserved benefit, since by its nature, these vocations are deemed “public service” professions, in which the welfare of others is placed above your own. So when the time for retirement comes (and it can come very quickly), you’ll need to be cognizant of the options at your disposal. 

One of those options is to actually retire and start enjoying all those activities you’ve dreamed of doing; traveling, playing golf or maybe starting your own business. But, what if you’re either not ready to retire or haven’t saved enough to do so at this time? That’s where the DROP Plan comes into play. 

DROP stands for Deferred Retirement Option Program and it allows civil servants the option to keep working and add to their retirement savings. The following bullet points address the major takeaways. They are:

• Instead of retiring, the worker keeps working (for up to five years in Florida)
• DROP allows the employee to work longer and add to their retirement savings after their pension (defined benefit plan) has been maxed out
• The employer places an annual lump sum into a separate account, which earns interest
• The annual amount of the lump sum is based on the employee’s average annual salary and how many years of service they worked, multiplied by an “accrual rate”
• At actual retirement, the account can be taken as a lump sum, rolled over to a deferred compensation plan or rolled over to an IRA or other qualified account
• If taken as a lump sum, the full amount is taxable, which is why many participants choose to roll some or all of it over to an IRA (continued tax deferral)

As you can see above, the DROP program allows civil servants the option to continue to save for retirement for another five years, thereby enhancing their retirement. It also offers options on what to do with the money once you do decide to fully retire. Although many decide to take the lump sum and pay off their debts, this can result in a large tax bill most are unprepared to deal with, with the amount withdrawn being fully taxable (and possibly pushing you into a higher tax bracket). While the logic of becoming debt free is sound, handing over a large amount of your hard earned cash to Uncle Sam can not only be painful, but damaging long term, since that money cannot now be used to generate additional wealth and/or income. 

Other options, such as rolling over some or all of your DROP funds to an IRA or other qualified plan, can allow for continued tax deferral, as well as giving you the power to decide when and for what reason to withdraw funds. Doing so gives you control of your withdrawals which allows for more control over your taxes.  

If you’re a civil servant and would like to learn more about the DROP Plan, what your options are if you’re near retirement and how to plan your retirement by incorporating DROP, please contact me at d.babecki@db3insuranceservices.com or give me a call at (941) 704-3134. As always, thank you for reading and let me know how I can be of service.

The above article reflects the opinions and thoughts of David J. Babecki. The information contained in this material is believed to be reliable, but not guaranteed. It is for informational purposes only and is not a solicitation to buy or sell any products which may be mentioned. It is not intended to be used as the sole basis for financial decisions, nor should it be construed as advice designed to meet the particular needs of an individual’s situation.

Please note: All guarantees and/or promises are based on the claims-paying ability of the respective insurance company.