Drop Accounts

The DROP Decision

Taking your DROP distribution in cash or rolling it over to another retirement plan is an important question facing DROP participants.

Yes, it is tempting to simply take the funds in cash, but consider the consequences:

  • Your DROP distribution is 100% taxable at your income tax rate.
  • Your employer is required by law to withhold 20% of your distribution for payment of income tax.

The Rollover Decision

With a rollover to another retirement plan, you continue to earn tax-deferred investment returns on your DROP funds until you begin Required Minimum Distributions, generally at age 70 1/2 or choose to make a partial withdrawal.  At that time, you are taxed only on the assets you withdraw, and your DROP funds are not subject to the 20% withholding on distributions. That means your DROP funds will continue to go to work for you.

Consider the following when deciding which retirement plan funding product to choose:

  1. Think long term - Life expectancies are increasing and you don't want to outlive your assets. Explore ways to generate income at retirement that could last for the rest of your life.
  2. Make the most of tax advantages - The government wants you to plan for your financial future. That's why there are a number of tax-advantaged plans and investments available to you that allow you to accumulate your retirement savings using tax-deferral.
  3. Go for growth potential - You would not buy a home if you did not think it would appreciate in value. You should consider taking the same attitude with your long-term investments, making sure they align with your financial objectives and risk profile.
  4. Diversify - One of the best ways to help manage risk is to diversify among asset classes, investment style and types of securities. Make sure your investments do not react the same way to market and economic conditions.
  5. Stay focused and disciplined - A blueprint for a more successful retirement often involves staying focused and disciplined. Consider financial products that provide flexibility and features that enhance your plan.
  6. Work with a solid company - After all, planning for any substantial goal could require years of commitment. You need a financial services company as committed as you are to help you realize your dreams.