What is the DROP!?

The drop is essentially what lets someone keep working even though they are eligible to retire while their pension payments added up in a separate account instead of being paid out.

The DROP ( Deferred Retirement Option Plan) is a pension system thats offered that lets an employee that is already eligble to retire keep working while their pension payments accumulate separately instead of being paid out.

So in other words once you reach retirement eligibility for your department (whether its years of service OR you reach the age needed to retire), you can enter the DROP. At this point your pension gets calculated and then that amount goes into the drop. You can continue working and keep earning your regular salary and when you decide to leave the job you will receive the drop as a lump sum if you wish or it can be rolled into an IRA. at that point you will be collecting your pension going forward for the rest of your life.

Why do we need the DROP?

If you were to retire at 50, you would have a pension that pays you out a defined amount every month however one of the costliest fees of life is health insurance. You are going to have to factor the cost of health insurance into your daily life when beforehand, your department typically sponsors it.

Some people are choosing to work in the DROP now to continue receiving benefits as well as extend their worklife and pay to make it closer to 65 so they have less years of paying outrageous prices for health insurance. At the older age, people would rather stay in a more senior position in the fire service compared to working a new job having to learn new skills in order to make ends meet.

Is DROP the same everywhere?

Of COURSE NOT. Its always got to be a little more complicated when it comes to finances! This is not a nationally standardized system, so it can vary greatly from department to department.

The most common and easily understood difference in length. Theyre typically offered from 3-8 years.

An important distinction and question you should ask is whether or not your pension calculation gets frozen once you enter the drop. It may be important for you to know if eventual raises while you in the drop increases your pension amount or not.

Sometimes the pay out structure are different: Lump sum, IRA rollover, a structured annuity or a combination of the options above.

Taxes..

If you decide to take the DROP account as a LUMP sum ( the distribution gets paid directly to you) the IRS requires the plan to withhold 20% automatically for federal taxes. Its not your final tax bill just what gets withheld upfront.

It's important to note that your real tax liability includes the total income of the year which includes that lump sum from the drop. SO this means it can push you into a much larger bracket than just 20% for that year meaning you could owe significantly more than what was witheld.

If you want to avoid that tax hit you could directly rollover your DROP into a IRA or eliglble account. Doing this will mean:

1. No mandatory 20% witholding

2. No immediate taxe owed

3. Taxes get deferred until you actually withdraw funds from the IRA ( probably a good idea to do this over multiple years while you are retired)

Other tax considerations

This is a section that I will highlight:

These states listed either do not have state income tax OR exemptions for taxing pension income. (the other states tax pensions/drop income like other income and offer few exemptions:

1. Alaska

2. Florida

3. Nevada

4. New Hampshire

5. South Dakota

6. Tennessee

7. Texas

8. Washington

9. Wyoming

10. Hawaii

11. Illinois

12. Iowa

13. Mississippi ( pensions 401k, IRA distributions are all exempt after age 59 1/2

14. Michigan ( exemption only up to $67,610 for single filers and $135,220 for joint filers

The ones listed below tax private pension but exempt government/ public safety pensions:

• Louisiana — Public pensions untaxed; private pensions partially taxed.

• Massachusetts — Public pensions untaxed; private pensions fully taxed.

• Wisconsin — Same pattern: public pensions exempt, private pensions taxed.

• New York — A particularly useful example for your readers: a retired firefighter or police officer's government pension is fully exempt from NY state tax, while a private-sector pension only gets a limited exclusion (around $20,000).

There are a few states that also have Partial Pension exclusions: Georiga, South Carolina, Delaware, Colorado, Kentucky, Virginia, New Jersey, New York, Oklahoma, Idaho, Indiana, Maryland, Maine, Ohio, North Dakota.

( link for more information)

More Things to consider before DROPping

You should consider what the interest rate is on the DROP account, how long you might live post retirement (If you are entering the time of retirement at 60, maybe you shouldnt drop), or if you're a GURU that can read the stock market like a book perhaps you can get a higher yield of return by investing your DROP money yourself.

In conclusion, the drop is a vastly lucrative option that benefits many people. Its important that you look into everything that is entails, and if done right will greatly benefit you!

Disclaimer: This guide is for general informational purposes and reflects rules understood to be current as of mid-2026. Tax law changes frequently and varies by individual circumstances. Consult a CPA or tax professional familiar with your specific state and pension system before making financial decisions.