What Can You Do With Your DROP Account?

Date: Feb 07, 2020


If you are eligible to participate in the Deferred Retirement Option Plan (“DROP”), you have the chance to build up a sizeable nest egg during your participation period. (See the DROP Fact Sheet for more information.) When you’re ready to exit DROP and fully retire, you’ll have to decide what you want to do with that nest egg. Here are your options:

  • Receive the funds as a lump sum payment. This option is often utilized by members who want to purchase an expensive item – such as a luxury vehicle, boat, or piece of property. Some members choose this option because they want to pay off all or most of their debts before they officially retire, including a mortgage or other loan. However, it’s important to realize that if you take your DROP account as a lump sum, SDCERS will be required to withhold taxes at a rate of 22% (20% federal, 2% state). 

  • Rollover the funds to a qualified plan. Many members choose this option to reinforce their existing IRA or 401(k). Maybe their other retirement portfolios are doing exceptionally well and they want to increase their investment returns in those areas. Another benefit of this option is that a rollover is not taxed right away – you won’t pay any taxes on these funds until you eventually withdraw them from the rollover account.

  • Annuitize the funds (over 20 years or life expectancy). If you annuitize your DROP account, you will receive the funds in small increments every month, added to your regular monthly pension benefit. However, you can elect to end your annuity at any time and receive the remaining principal balance of your DROP account as a lump sum or a rollover, which provides an extra layer of insulation if you are faced with some sort of financial emergency later on.

    Another reason this is a popular option is because it generally allows the Member to avoid jumping up to a higher tax bracket, which is often a consequence of receiving the funds as a lump sum. Instead, the monthly annuity will be taxed as regular retirement income in accordance with applicable federal and state tax laws. Besides the potentially beneficial tax implications, when you annuitize your DROP account, the monthly annuity calculation has interest built in at the DROP annuity rate in place as of the date you exit DROP. Therefore, the entire amount you receive over the term of the annuity is greater than the balance of your DROP account when you first exit.

    That last part is important – no matter what happens to the DROP annuity rate in the future, whether the Board increases or decreases it, your rate is locked in as of the date you exit DROP. The Board typically votes on the following year’s DROP annuity interest rate at the November Board meeting, so pay attention to what they decide – if they vote to lower the interest rate, it won’t go into effect until January 1st, so it may be in your best interest to exit DROP by December 31st. Alternatively, if they decide to increase the rate, you will know to wait until the New Year to exit DROP so you can lock in that higher rate!

  • Combination. The last option is to receive part of your funds one way, and the rest another way. For example, you can take half of your funds as a lump sum to pay off your mortgage or get that new car you’ve had your eye on, and then annuitize the rest. Or maybe your 401(k) portfolio is doing really well and you want to invest another $100,000 in it. You can do that too and then annuitize the rest or take the remainder as a lump sum.

However you decide to receive your DROP account, just make sure it’s the right choice for your financial circumstances. It doesn’t matter what anyone else does – just do what makes sense for you and your future!

Document Under Categories: DROP, News Articles