FRS DROP Exit Options: Lump Sum, Rollover, or Investment Plan?

For many Florida Retirement System (FRS) members, the Deferred Retirement Option Program (DROP) becomes one of the largest financial balances they’ll ever receive. After years of service, overtime, and accumulated DROP interest, the exit decision can feel both exciting and overwhelming.

When you leave DROP and officially retire, you generally face three main choices for your DROP balance:

1. Take a lump-sum distribution
2. Roll the balance over to an IRA or other qualified plan
3. Move the funds into the FRS Investment Plan

None of these options is automatically “right” or “wrong.” Each comes with different trade-offs around taxes, flexibility, control, and long-term planning. The goal of this article is to explain what each option means so you can make a more informed decision.

First, a Quick Reminder: DROP Is Paid After You Retire

Your DROP balance is not paid while you are still working. It is distributed after you terminate employment and retire under FRS rules, and after your employer reports your separation.

The timing of that payout matters for:

• Taxes
• Cash flow
• Rollover paperwork
• Reemployment rules

Once the DROP distribution occurs, you are considered officially retired for FRS purposes.

Option 1: Taking a Lump-Sum Distribution

What this means

You receive your DROP balance directly, in cash, in your own account.

Potential advantages

• Immediate access to the money
• Maximum flexibility in how the funds are used
• Useful for paying off debt, major purchases, or building cash reserves

Important considerations

• The distribution is generally taxable in the year you receive it
• Mandatory withholding may apply
• A large lump sum can push your income into higher tax brackets
• Once taken, those funds are no longer in a tax-deferred retirement account

This option is often chosen for simplicity or immediate needs, but it usually comes with the highest immediate tax impact.

Information provided should not be considered as tax advice from GWN Securities, Inc. or it's representatives. Please consult with your tax professional.

Option 2: Rolling the DROP Balance to an IRA or Other Qualified Plan

What this means

Instead of taking the money as cash, you move it directly (via a direct rollover) into:

• A traditional IRA
• Or another eligible retirement account

Potential advantages

• Generally no current taxes at the time of rollover
• The money stays tax-deferred
• Ability to coordinate this account with other retirement savings

Important considerations

• Future withdrawals are still taxable (for traditional accounts)
• You take on more responsibility for managing investments and withdrawals
• Fees and investment options depend on where the IRA is held
• Required Minimum Distributions (RMDs) will apply later, based on IRS rules

This option is often used by retirees who want continued tax deferral and more control over how the money is invested and accessed over time.

Option 3: Moving the DROP Balance into the FRS Investment Plan

What this means

Instead of taking the money out of the FRS system, you keep it inside FRS by transferring it into the FRS Investment Plan.

Potential advantages

• Continued tax-deferred growth
• No need to open or manage an outside account right away
• Ability to use the FRS SDBA (Self-Directed Brokerage Account)*
   
• Potential ability to make withdrawals before age 59 1/2 which may not be an option in an IRA or another retirement account.**

*A Self-Directed Brokerage Account (SDBA) is for experienced investors who want the flexibility to invest in a variety of investment options beyond those available in your employer plan's primary investment funds. It is not suitable for all members. Like the Investment Plan's primary investment funds, there are risks associated with the investments in the SDBA and you assume the full risk and responsibility of the investments you select.

**Information provided should not be considered as tax advice from GWN Securities, Inc. or its representatives. Please consult with your tax professional

Important considerations

• Investment choices are limited to the FRS menu, or options available with the SDBA
• Distribution rules are governed by the FRS Investment Plan
• RMD rules still apply at the appropriate age
  
  

This option can make sense for retirees who value simplicity and low costs and are comfortable with the FRS investment options.

How to Think About the Choice (Without Picking for You)

Instead of asking, “Which option is best?” it’s often more useful to ask additional questions such as:

• Do I need cash now, or can I leave this money tax-deferred?
• How important is investment flexibility to me?
• Do I prefer simplicity or control?
• How does this decision fit with my pension, Social Security timing, and other savings?
• What will my tax situation look like in the year I retire?

Each option solves a different problem. The appropriate choice is the one that aligns with your overall retirement plan.

Common Mistakes to Avoid

•  Taking a lump sum by default without considering taxes
•  Missing rollover paperwork deadlines
•  Assuming all options have the same tax impact
•  Forgetting how this interacts with RMDs later
•  Making the decision in isolation from the rest of your retirement income plan

Final Thoughts

Your DROP balance represents years of work and planning. Whether you choose a lump sum, a rollover, or the FRS Investment Plan, the decision deserves a few minutes of thoughtful consideration.

The good news is that FRS gives you multiple paths — not a single forced outcome. Understanding how each option works helps you align your choice with your tax situation, income needs, and long-term retirement goals.

Retirement isn’t just about how much you’ve saved — it’s also about how you choose to use it.