For many Florida Retirement System (FRS) members—especially Special Risk employees—the Deferred Retirement Option Program (DROP) can become one of the largest financial assets they will ever receive. After years of service, overtime, and salary growth, the DROP balance often represents a substantial portion of a retiree’s nest egg.

When DROP ends, retirees must decide what to do with that accumulated balance. One of the most common options is rolling DROP into an IRA. But before moving funds, it’s important to understand how the rollover works, what the rules are, and what factors to consider.

This guide breaks it down in simple, clear terms.

What Exactly Is a DROP Rollover?

When you exit DROP and officially retire, FRS will distribute your DROP balance. You generally have three avenues:

1. Roll the balance into a traditional IRA or qualified retirement account

2. Take a lump-sum distribution (subject to tax withholding and possibly penalties)

3. Leave the funds in the FRS Investment Plan (if you choose that option)

A direct rollover to an IRA is often chosen because it allows retirees to maintain tax-deferred status and avoid immediate taxation on the distribution.

Timing Your DROP Payout

Your DROP balance is typically paid out in the month following your retirement date, assuming your employer has correctly reported your separation to FRS.

Many retirees consider:

• Whether the payout year aligns with other income

• Whether delaying or accelerating retirement changes tax brackets

• How the timing interacts with other benefits or distributions

Even though this decision is financial, retirement timing is often influenced by personal and career factors as well.

The Tax Side of a DROP Rollover

A direct rollover from DROP to an IRA is generally not taxable at the time of transfer.
Instead:

• Taxes apply later when distributions are taken from the IRA

• Traditional IRA rules govern early withdrawal penalties

• Roth rollovers create a taxable event but may offer different long-term flexibility

  A distribution from a Roth IRA is tax-free and penalty-free provided that the five-year aging requirement has been satisfied and one of the following conditions is met: age 59 1/2, death, disability

If FRS sends the distribution to you instead of the IRA, mandatory withholding rules apply, so ensuring correct paperwork is essential.

Why Some Retirees Move DROP to an IRA

There are several reasons an FRS member might choose a rollover:

1. More Investment Options

IRAs can potentially offer a broader investment menu compared to the FRS Investment Plan.

2. Greater Control Over Withdrawals

IRAs allow retirees to structure withdrawals based on their retirement income needs, rather than the standardized distribution schedules available inside FRS.

3. Potential for Consolidation

Combining DROP with other retirement assets (such as 457(b), IRAs, or old 401(k)s) can simplify long-term planning and monitoring.

Considerations Before Rolling Over DROP

A rollover is a significant decision. Here are key factors to weigh carefully:

1. Fees

The FRS Investment Plan often has lower administrative fees than many retail investment options, though this varies from one custodian to another.

3. Investment Risk

Moving DROP into more volatile or unfamiliar investments can introduce risks that may not match a retiree’s comfort level.

3. Timing of Other Income

DROP payouts in the same year as salary, leave cash-out, or a pension could impact a retiree’s tax bracket if not rolled over correctly.

4. Early Withdrawal Penalties

Withdrawals from an IRA before age 59 & 1/2 can often come with a 10% early withdrawal penalty. There are sometimes options to avoid this early withdrawal penalty, especially for special risk class members by instead using the FRS investment plan, or another employer sponsored retirement account. Click Here to see a previous blog post about that.

Final Thoughts

Rolling over DROP into an IRA can offer flexibility, investment choice, and consolidation — but it also shifts responsibility to the retiree to manage risk, withdrawals, and tax planning.

FRS members should:

• Understand the tax implications

• Review their income strategy

• Know their comfort level with investment decisions

• Speak with their tax professional about these options
  
  

• Ensure rollover paperwork is completed correctly

• Consider how DROP fits into pension income, HIS, and Social Security timing

A well-structured plan can make DROP a powerful part of your retirement picture for decades to come.