Have your cake and eat it too?
Like so many others, over the years I have often heard the idiom, “you can’t have your cake and eat it too.” Depending on what region of the planet you live on, it may be expressed differently. In Russia when translated, they say “you can’t sit on two chairs” and in Germany they say “you can’t dance at two weddings”. It took a while for me to truly grasp the meaning, but as I got older, and experienced the realities of life the expression became clear. Compromises and trade-offs are expected. In the grand scheme of life, that is the rule, if you want a new iPhone, you sign a new contract. Just like you can’t have dessert without taking in the calories; we can’t experience life without adding a few years and a couple of wrinkles; and if you’re retiring from an employer you can’t take the lump sum and still have the pension…….. Or Can you???
In most cases, employers offer limited options when it comes to retirement, if any at all. In Florida, our public servants that are members of the Florida Retirement System* (FRS) have a number of neat options. Among them is the popular Deferred Retirement Option Program, better known as DROP. This may very well be the exception to the rule.
The DROP program is unique to members of the FRS. There is a video that explains DROP in a very simple fashion. It can be found at http://voyageretirement.com/drop.php. This arrangement allows qualified members to retire from the FRS but maintain their employment through their employer for up to five years. During this time the benefit is no longer accumulated but calculated and paid out over the months that they are participating in this program. Their pension check will be sent, not to the retiree but to a trust account with the state of Florida. In this drop fund, the money accumulates at a fixed interest rate, tax deferred. At the end of the five-year term, the employee must terminate their employment and start collecting on their pension benefit. What about the money in the drop fund? One of three options are available.
The first is commonly referred to as the “I love Uncle Sam” option or the lump sum option. If this is chosen, a check for the entire D.R.O.P. amount (minus a mandatory withholding of 20% for taxes) will be sent to the retiree in the form of a check. If this option is chosen, you must be very careful. This money has never been tax before, so it inevitably will make your taxable income for the year increase, and you may be pushed into a new tax bracket that you were not prepared for.
The second option is commonly used and in most cases the preferred option of the three, the direct rollover option. Suppose you have an existing retirement account (IRA, 403b, 457, 401k, etc.). It may make sense to consolidate or rollover these funds into of your qualified accounts for the purpose of avoiding any immediate tax repercussions.
The third option, is a hybrid of the first two, the partial lump sum/rollover. Let’s say, you have been putting off the trip of a lifetime, i.e. the Alaskan cruise, the safari in Africa, climbing Mount Kilimanjaro. Whatever it may be, you can use a portion of these funds to pay for that immediate trip or home renovation project by taking out a partial cash distribution, while the rest of the money is rolled into a qualified retirement account.
No matter what your decision is, the state of Florida must receive instructions on what to do with these funds. You are allowed up to 60 days after your exit from drop to instruct the FRS on what to do with those funds. If the instructions are not received, the check will be sent to you minus any applicable taxes. This is not a situation in which procrastinating will get you a bad seat in a movie theater during opening night, but rather a possible seat across the table from the IRS. Consult with a tax professional before choosing the lump sum payout.
There are various ways to qualify for the DROP program. In my experience, I have seen plenty of individuals efficiently utilize the money they receive from drop to supplement their other retirement income, ultimately providing them adequate and often more income in retirement then they received while they were working. Before making any decisions, I urge you to schedule a meeting for a review with a qualified retirement representative.
Maybe we have all had it wrong, and maybe the saying needs to change. “You can’t have your cake and eat it too…unless you are a member of the FRS participating or retiring from the DROP program.”
Our friends over at Security Benefit (the NEA Retirement Program) have made a short piece on the DROP program. If you are an FRS member and would like a copy mailed to you, please e-mail us at firstname.lastname@example.org.
480 South Keller Rd. Suite 101
Orlando, FL 32810
*Reference source https://www.rol.frs.state.fl.us/forms/drop-guide.pdf
Securities offered through GWN Securities, Inc. 11440 N Jog Road, Palm
Beach Gardens, FL 33418 561-472-2700 Member FINRA, SIPC. Voyage
Retirement Solutions and GWN Securities, Inc. are not affiliated.