Finance Experts Assert Rolling Over DROP Funds Is No Simple Task for Participants

Florida DROP program participants may be heading for a windfall when the time to collect their deferred retirement benefits arrives. Careful planning can help prevent some financial drawbacks in the long term.

MAITLAND, FL – 10/12/2016 — Participants in the Florida Retirement System Deferred Retirement Option Program (DROP) are often unprepared to decide exactly how to collect their DROP payment when their employment comes to an end. Since these payments can be substantial, the decision on how to receive the funds can significantly impact their retirement finances over the long term.

The DROP program is a qualified retirement plan available to eligible Florida Retirement System (FRS) Pension Plan members, which includes state and county employees. According to a report from the Office of Program Policy Analysis and Government Accountability (OPPAGA), there are two perspectives on why the DROP program was created in 1998. One perspective is that the plan was intended to be an early retirement incentive to reduce payroll costs by encouraging older, presumably higher paid, employees to leave the workforce. A second perspective holds that DROP was intended to be a tool for retaining highly experienced employees in the workforce and avoid training and turnover costs.

DROP allows eligible career public employees, as well as eligible members of the Teachers’ Retirement System (TRS) and the State and County Officers and Employees’ Retirement System (SCOERS)—whose defined benefit plans were closed to new members when the FRS was created in December 1970—to retire without terminating their employment for up to five years.
During those five years, their retirement benefits accumulate and earn interest compounded monthly at an effective annual rate of 1.3 percent.

To be eligible to participate, one must be an active member of one of these plans. FRS renewed members and members of the various optional retirement programs available under the FRS are not eligible to participate in DROP.

Once participation in the DROP program comes to an end, members who have been accumulating tax-deferred retirement benefits in the FRS Trust Fund must decide how to take their DROP payment—as a lump sum, as a rollover to another eligible retirement plan or an IRA, or as a combination of the two.

Donald Anders, investment advisor, insurance professional and co-founder of Anders & Anders Financial Group in Maitland, Florida, advises DROP participants on their options for rolling payments over into a qualified plan.

“DROP participants begin accumulating retirement benefits while delaying their termination or retirement for up to 60 months from the date they first reach their normal retirement date or eligible deferral date,” Anders says. “They simultaneously earn a salary while their monthly retirement benefits are held in the FRS Trust Fund on their behalf until they leave the program.”

“It’s a great strategy for retirement and it costs the state nothing—participants are simply paying themselves their own money.”

DROP participants are considered to be retired when they enter the program, so they stop earning retirement service credit. They sign a contract to continue working for their FRS employer for a maximum of 60 months. When their program participation ends, they receive their DROP payout and begin receiving monthly retirement benefits in the same amount determined at retirement, plus annual cost-of-living increases. The longer one participates in DROP, the greater their financial gain. For many, DROP provides the financial reliable lifetime monthly benefit and an opportunity to accumulate additional savings while they are working.

When it comes time to collect, making the right choice on how to take payments is critical, according to Anders. While it may be tempting for some to take a lump-sum payment on their DROP benefits, there are consequences. For instance, 100 percent of a DROP payout is taxable in the year in which the payout is made. In addition, the employer is required by federal law to withhold 20 percent of the distribution for payment of income tax, and some may have to pay even more taxes than the amount already withheld, depending on their income tax bracket.

Taking the lump-sum before turning age 55 (or 50 for public safety officer retirees), may mean the participant owes an additional 10 percent federal excise tax penalty on the lump-sum distribution.

“If you roll over your DROP assets to an eligible retirement plan—for instance, a 403(b) TSA or 457(b) plan in which you participate—you can continue to earn any tax-deferred investment returns on your DROP assets until you begin required minimum distributions, which generally begin in April of the year following the year in which you turn 70 ½,” Anders says. “Or you can choose to make a partial withdrawal.

“You have several rollover choices for your DROP assets.”

Current or former participants in a 403(b) TSA or governmental 457(b) plan may be able to roll their DROP assets right into their 403(b) or 457(b) plan account if it accepts rollovers. Other rollover choices include the FRS Investment Plan; other 403(b), governmental 457(b), 401(a), or 401(k) plans that accept rollovers; or an individual retirement arrangement (IRA) that provides tax-deferral of earnings. A Roth IRA is not an eligible rollover option.

Charges, risks, expenses, and investment objectives vary depending on the funding option and investment choices within each option, which is why it is so important for participants to review all rollover choices before making a decision. According to Anders, variable annuity and mutual fund investors should consider the charges, risks, expenses, and investment objectives of these products before investing, and request a prospectus containing relevant information from a financial professional.

“Your best choice depends on your individual circumstances and needs,” Anders says. “For example, if you plan to continue working after DROP; if you have a spouse or partner who will continue to work; your current assets and liabilities, and plans to leave a financial legacy all play a role in making a decision.”

The decision should also reflect how much money will be needed to support oneself in retirement and how that relates to their current sources of retirement income—such as personal savings, pension payments, Social Security (if eligible), and other annuity payments.

Deciding what to do with DROP assets is not simple. Consulting a financial professional may help.

Disclaimer: Securities and advisory services through Madison Avenue Securities, LLC (MAS), member FINRA/SIPC, and a Registered Investment Advisor. MAS and Anders & Anders Financial Group are not affiliated companies. Anders & Anders is not affiliated with any governmental agency.

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