When you leave the Florida Retirement System’s Deferred Retirement Option Program (DROP), your account balance may be one of the largest sums you’ll ever receive at once. How you take it affects how much tax you pay this year, how much you keep long term, and how easily you can get to the money. Your election on Form DP-PAYT is also final once FRS processes it. Here’s how the choices compare. (New to DROP? Start with What is DROP?)
The three DROP payout methods
FRS’s DROP Selected Payout Method Form (DP-PAYT) offers exactly three options.
1. Lump sum
FRS sends the full balance to you, minus mandatory federal tax withholding of 20%.
- Pros: immediate access to all of it, and it’s simple.
- Cons: the entire amount is taxable as ordinary income in the year you receive it, which can push you into a higher bracket. The 20% withheld may not cover all the tax you owe. Unless you leave DROP in or after the year you turn 55 (50 for eligible public safety officers; see FRS Special Risk retirement), an additional 10% early-withdrawal tax may apply.
- Changing your mind: you can still roll the money into an eligible plan within 60 days of the payment date. To avoid tax on the full amount, though, you’d have to deposit 100% of the gross amount, which means covering the 20% that was withheld out of your own pocket. You’d get the withheld amount back when you file your tax return.
2. Direct rollover
FRS sends the balance straight to the custodian of an eligible retirement plan. Nothing is withheld on a rollover to a pre-tax plan, and you owe no tax until you withdraw.
Eligible destinations include:
- A traditional IRA
- An eligible employer plan that accepts rollovers, such as a 401(a), 401(k), 403(b), or governmental 457(b)
- The FRS Investment Plan, which state law allows as a DROP rollover destination
- A Roth IRA. This is an after-tax conversion, so tax is due on the amount converted.
Any after-tax contributions in your account (for example, pre-1975 employee contributions or service credit bought with after-tax dollars) are paid to you tax-free and can’t be rolled over.
Pros: the money keeps tax-deferred status, and you control the timing of withdrawals and taxes. Cons: withdrawals are taxed later, and investment fees and risk depend on where the money goes. A custodian representative has to sign page 2 of DP-PAYT.
3. Partial lump sum and rollover
You choose an amount to receive in cash, minus 20% withholding, and the rest goes by direct rollover. This works well when you have a specific near-term need, such as paying off a mortgage, a vehicle, or an emergency fund, but want the rest to stay tax-deferred.
Side-by-side comparison
| Lump sum | Direct rollover | Partial | |
|---|---|---|---|
| Federal withholding by FRS | 20% | 0% (pre-tax plan) | 20% on cash portion |
| Taxed now? | Yes, all of it | No (unless Roth) | Cash portion only |
| Immediate access | All | None until you withdraw | Part |
| Custodian signature needed | No | Yes | Yes |
| Reversible after processing | No | No | No |
Where should a rollover go?
FRS Investment Plan. MyFRS.com notes that you can roll DROP funds into the Investment Plan, which offers low-cost investment funds and several distribution choices, including periodic payments and lifetime income options. You’ll need the DROP Accumulation Direct Rollover Form and an Investment Plan beneficiary form, because your Pension Plan beneficiary doesn’t carry over.
IRA at a private custodian. This gives you more investment choices and consolidation, but compare fees, any commissions, and surrender charges carefully. MyFRS points out that fees come straight out of your investment returns.
Employer plan or 457(b). These have different withdrawal rules. Ask the plan administrator before you choose one.
Before deciding, think about what you’ll pay in fees, how you’ll take income, the tax treatment of withdrawals, and who will manage the money as you age.
Questions to answer before you choose
- Do I really need cash now, and how much?
- What tax bracket will a lump sum push me into this year? What about next year?
- Will I be subject to the early-distribution penalty?
- What will the receiving account charge each year?
- How will this money turn into income alongside my FRS pension and Social Security, if I have it?
- Have I named beneficiaries on the new account?
Deadlines that matter
- 60 days after your DROP termination date: if FRS hasn’t received your DP-PAYT, state law requires it to pay a lump sum minus 20% withholding. Not choosing becomes a choice.
- Signatures: check DP-PAYT for notary and custodian signature requirements and line them up early.
- Once the payment is processed: the Division can’t change it or accept funds back from a custodian.
See our step-by-step guide to leaving DROP for the full timeline.
Free official help
FRS offers free, non-commission guidance through the MyFRS Financial Guidance Line at 1-866-446-9377, Option 2. We encourage you to use it. We can then walk you through the forms and timing, and connect you with an independent advisor or tax professional for the investment and tax decisions. School employees may also want Retiring from a Florida public school.
Get help with your DROP paperwork
Florida Pension Planners guides FRS members through the DROP process: your dates, your forms, and your deadlines. If you need investment, tax, or legal help, we connect you with an independent advisor or other licensed professional. We can’t promise any particular outcome, but we can help make sure nothing is missed.
Book a free 30-minute review · Call (850) 296-8828 · Email frshelp@floridapensionplanners.com · Office: 301 N Pine Meadow Dr, DeBary · Contact us
Related guides: What is DROP? · FRS Special Risk retirement · Retiring from a Florida public school · Official FRS DROP guide (PDF)
Counties we serve: Volusia · Seminole · Orange · Flagler · Lake · Osceola · Marion · Brevard · Putnam
Disclaimer: Florida Pension Planners is an independent educational service and is not affiliated with, endorsed by, or acting on behalf of the Florida Retirement System, the State Board of Administration, the Division of Retirement, or any employer. This page is general education, not individual tax, legal, or investment advice. FRS rules change; confirm your own benefits and deadlines with the Division of Retirement (frs.fl.gov) or MyFRS (myfrs.com). No outcome or return is promised. Any advisor or professional we connect you with is independent and solely responsible for their own advice and services.
