Deferred Retirement Option Plans (DROPs)
For many first responders, reaching the max service years and benefit amount for their pension comes with a lot of decisions. “Can I afford to retire?” “Will I be able to live the life I want in retirement?” “Do I even want to retire?” Having a DROP available can play in to answering all of these questions.
What is a DROP?
A DROP is a voluntary benefit that allows a first responder, that would otherwise be eligible to retire, to continue working. But instead of continuing to accrue benefits towards your pension, a pre-tax sum of money is added to a separate account.
Depending on the DROP, a first responder may have to select how many additional years they would like to work past full retirement. Pension benefits are then frozen at that point in time. Once that time limit is reached, the first responder will retire and receive the balance in their DROP.
It is important to talk to an advisor on what would potentially be greater, the lump sum value of the DROP or the potential additional pension benefit.
What is contributed to the DROP?
Every DROP can have a different method of determining what is contributed. Some municipalities will contribute a percentage of salary while others may contribute the frozen pension benefit. Understanding how contributions are made is an important part of deciding whether to start the DROP and how long to continue working.
How is interest earned?
Funds are deposited into an interest-bearing account. Interest is credited based on the performance of the trust account.
At the end of the selected time period, the first responder will need to decide how to receive the benefit.
Lump Sum: The DROP can be received as a lump sum distribution. Often, this option is less likely to be chosen because it will result in paying taxes on the full amount at that time.
Installments: Some plans allow for funds to be distributed in installments, similar to a pension. Taxes are paid at the time of the installment payment.
Rollover to a Qualified Plan: This is the most commonly selected option. A rollover allows the funds to be rolled into an IRA and the funds can be distributed at the first responder’s discretion.
Why take the DROP?
DROPS allow benefits for both first responders and the municipalities they work for. For the municipality, it allows them to retain first responders for additional years, creating stability and having a known benefit payout. In some cases, it can also save the employer in the long term because service credits are no longer accrued from the day the DROP starts. For the first responder, it allows for flexibility for not only their retirement date but having an additional account to fund it.
For advice and guidance on your DROP and what the options are, contact ANEW ADVISORS!