One of the benefits of being a professional firefighter, law enforcement officer, or other public safety professional is the availability of a deferred retirement option plan (DROP). These plans were created in the 1980s as municipalities and other governing bodies grappled with the problem of prematurely losing the valuable services of experienced public safety and service professionals. For employers, DROPs are a win because they can help retain the knowledge and experience of veteran public safety professionals who might otherwise enter retirement sooner. For employees, DROPs are beneficial because they can allow you to remain actively on the job for more years while still adding to the funds available to support a stable and secure retirement.
How DROPs Work
You can elect to enter a DROP when you are otherwise eligible for retirement and qualified to begin receiving pension payments from your defined-benefit plan. However, instead of drawing the payments, your DROP places your benefits in an interest-bearing account which continues to accumulate and earn interest for the duration of the DROP. You continue to work and earn your salary and any applicable overtime. This additional period of working, however, typically does not add to your years of service for calculating your pension benefits; that is determined at the time you enter your DROP. At or before the end of the maximum allowed participation limit period (usually five years), you must stop working and begin drawing your pension.
What Happens When I Stop Working?
At the end of your participation in the DROP, the amount accumulated in the plan becomes available to you. Typically, you have three options for how you will take this money (depending on the options offered by your DROP):
- Lump-sum distribution
- Rollover to IRA or deferred compensation plan
- Periodic payments
In addition to the funds in your DROP, of course, you will also begin receiving regular payments from your pension plan. It’s important to consider your particular financial situation before deciding how to receive your DROP balance. For example, a lump-sum distribution could be a great solution if you need money for a large purchase, such as real property or starting a post-retirement business. But because it will all be taxable as ordinary income during the year you receive it, you could take a tax hit. Rolling the funds into an IRA gives you greater control over how the funds are invested and also keeps them in a non-taxable environment, but when you reach the age for mandatory required minimum distributions (or whenever you begin making withdrawals from the account), you’ll begin paying taxes on the portion you receive.
Making a decision about DROP involves other considerations, such as knowing when you’ll be emotionally ready to retire, whether it’s better for you to work the maximum participation limit period or a shorter length of time, any special financial obligations you may have at retirement—such as educational funding or debts that need to be eliminated before retirement—and other questions unique to your situation.
At Mathis Public Safety Retirement, we have the expertise and experience with DROPs and other aspects of pension and retirement planning for public servants to help you make the decision that is best for your particular circumstances. Contact us to learn more about how we can work with you to create a plan for a secure, satisfying retirement.
