How Does the Los Angeles Deferred Retirement Option Plan (DROP) Work?
Travis McShane, CFP®, CFA
If you’re a qualified employee, the Los Angeles Deferred Retirement Option Plan (DROP) can be a powerful tool to boost your retirement savings. DROP is an enhancement to the L.A. Fire and Police Pension (LAFPP) system and is available to eligible members of the LAFD, LAPD, Harbor, and Airport departments.
What Makes DROP Unique?
With DROP, you can keep working and earning your salary while your pension starts accumulating in a separate account for up to five years.
During this period, your pension payments are deposited into a separate DROP account and earn a guaranteed annual interest rate of 5% (determined by the LAFPP board).
This can be an excellent opportunity to turbo-charge the amount you have accumulated for retirement alongside your deferred compensation (457) plan.
Eligibility Requirements
To participate in DROP, you must meet one of these criteria:
Tier 2 or Tier 4 employees: 25 years of service.
Tier 3, Tier 4, or Tier 6 employees: At least 25 years of service and age 50 or older.
What Happens After DROP?
When you exit DROP, you have three options:
Take a lump sum cash payment (taxable as ordinary income—often a big tax hit).
Roll over the balance into a retirement account (tax-free transfer; taxes apply only when you withdraw).
Combine options 1 and 2.
This is usually a good time to step back and do comprehensive tax planning that accounts for your unique circumstances and how they align with federal and state tax rules.
Other Retirement Planning Considerations
DROP is just one piece of your retirement puzzle. Here are a few other factors to consider:
Survivorship Options: LAFPP offers several survivor benefit choices for your traditional pension that will begin paying you directly once DROP enrollment ends.
Inflation: Even modest inflation impacts purchasing power over time. For reference, the 2019 cost-of-living adjustment (COLA) was 2.5%.
Estate Planning: Consider reviewing your beneficiaries and ensuring your estate plans align with your wishes.
Taxes: California’s high tax rates matter. Consider Roth conversions before required minimum distributions (RMDs) push you into a higher bracket.
Ready to Explore Your Options?
Schedule a 15-minute discovery call with a financial advisor to discuss how DROP fits into your overall retirement strategy.