🌠 Wh♊at Is a Deferred Retirement Option Plan (DROP)?

If you’re a public sector employee who's nearing retirement age but not quite ready to leave the workforce, a deferred retirement option plan (DROP) may be the answer. Introduced in the 1980s by public sector employers, DROPs are offered to some firefighters, police officers, and other civil servants who are eligible to draw from their employer's pension plans.

A DROP is an incentive for older workers to delay retiring. They get a sum of cash for every year they work beyond their official retirement age. Meanwhile, they're on the job instead of drawing pensions.

How a Deferred Retirement Oꦺption Plan🦋 (DROP) Works

⛄DROPs are designed for older workers who are eligible to retire i💖f they choose.

If they retire, these workers would be eligible to begin drawing benefits from their employers' 澳洲幸运5开奖号码历史查询:defined-benefit pension plan. Now relatively rare among private employers, many public service employers still provide these plans, which commit the employer to paying a set income for the life of the retiree.

If they opt to stay on the job, they may be eligible for a DROP.

An employee who accepts a DROP retains pension plan eligibility and has reached the maximum amount payable from the plan. In addition, the employer will deposit a lump sum into a separate interest-bearing account for each year the employee remains on the job. When the employee retires, the money in the account and the earned interest are paid to the new retiree.

DROP Rules Vary

The precise terms vary. For example, eligible members of Florida’s Retirement System pension plan have the option of taking the payout as a lump sum, a rollover into their State of Florida Deferred Compensation account, or a combination of a lump sum and rollover.

DROPs may impose a defined window of participation during which an employee can earn benefits. This varies too. In Florida, for example, employees can stay in the plan for up to eight years.

Calculating Your DROP Benefits

The amount of compensation you’re able to receive through a DROP is based on your average annual salary, how many years of service you have under your belt, the accrual rate, 💜and the length of time you participate in the plan. Here’s an exa🦹mple of how your benefits can add up.

Let’s say you’re 55 years old and have been a teacher for 25 years, earning an average annual salary of $40,000. Your state retirement system offers a DROP with an annual accrual rate of 2.5% and a participation limit of four years. If you multiply that $40,000 by the 2.5% accrual rate, then multiply that by 25 years, you’d get $25,000. If you were to work the full four years past you💟r retirement date, that’s $100,000 you’d have in your DROP.

DROP Pros and Cons

The number one benefit of a DROP for employers is that it allows them to keep employees working longer. In 🦂fields such as law enforcement and education, being able to keep a stable and experienced workforce is a definite advantage.

For employees wh♊o have maxed out their lifetime benefits from a defined-benefit plan, this is a chance to continue adding to a retirement nest egg.

However, they need to consider how those benefits are paid out. If it's a lump sum, the benefits would be taxed as ordinary income. Rolling over the funds to another 澳洲幸运5开奖号码历史查询:qualified plan or 澳洲幸运5开奖号码历史查询:individual retirement account (IRA) is one way to sidestep a bigger tax bill.  

The Bottom Line

Defeꦚrred retirement o🌠ption plans can be valuable for public-sector employees who want to delay retirement and bolster their savings.

If you’re eligible, be sure to read over the details carefully to ensure that you’re making the most of it. Also consider how a DROP lump-sum payment could affect y🦂our tax bi💎ll, and plan accordingly.