After years of dedicated public service, you're finally approaching the finish line. Your DROP account has grown nicely, and you're ready to enjoy the fruits of your labor. But here's the thing: how you exit DROP can mean the difference between keeping tens of thousands of dollars in your pocket or handing it over to Uncle Sam.

The Deferred Retirement Option Program (DROP) is one of the best retirement benefits available to Florida public employees. Yet every year, we see hardworking teachers, firefighters, law enforcement officers, and government workers make preventable tax mistakes that cost them thousands: sometimes tens of thousands: of dollars.

At Davies Wealth Management, we've helped countless Florida employees navigate their DROP exits, and we've seen these mistakes play out in real time. Let's break down the three most common (and costly) tax blunders so you can avoid them.

Table of Contents

  1. Understanding DROP: A Quick Refresher
  2. Mistake #1: Taking the Lump Sum Without a Rollover Strategy
  3. Mistake #2: Missing the 60-Day Distribution Deadline
  4. Mistake #3: Violating the Bona Fide Termination Requirement
  5. The Smart EXIT: Building Your Tax-Efficient Strategy
  6. Final Thoughts

Understanding DROP: A Quick Refresher

Before we dive into the mistakes, let's make sure we're on the same page about what DROP actually is.

The Deferred Retirement Option Program allows eligible Florida Retirement System (FRS) members to "retire" while continuing to work. During the DROP period (up to 60 months), your retirement benefits accumulate in a trust fund, earning interest, while you continue drawing your regular salary.

By the time you're ready to actually walk out the door, that DROP account can easily grow to $200,000, $300,000, or even more. It's a substantial nest egg: and that's exactly why getting the exit strategy right matters so much.

Glass jar filled with money on a desk representing growing DROP retirement savings for Florida employees

Mistake #1: Taking the Lump Sum Without a Rollover Strategy

This is the big one. And honestly, it's the mistake that hurts the most.

When you complete your DROP participation, you'll receive Form DP-PAYT from the Florida Division of Retirement. This form asks you to choose how you want to receive your accumulated DROP benefits. The two main options are:

Option A: Lump Sum Distribution
Take the cash directly. Sounds simple, right? Here's the problem: if you choose this route, the FRS is required to withhold 20% for federal taxes right off the top. On a $250,000 DROP balance, that's $50,000 gone before you even see the money.

But wait, it gets worse. That lump sum gets added to your taxable income for the year. Depending on your situation, you could easily get pushed into the 32% or even 35% federal tax bracket. Combined with the potential for additional state taxes if you're not careful about your domicile status (more on that in our estate planning resources), you might end up keeping only 60-65 cents on every dollar.

Option B: Direct Rollover
The smarter play for most people? Roll your DROP funds directly into an eligible tax-deferred account: like a traditional IRA, 401(k), or 403(b). With a direct rollover:

  • No mandatory 20% withholding
  • No immediate tax hit
  • Your money continues growing tax-deferred
  • You control when (and how much) you withdraw, spreading the tax burden over multiple years

The key word here is "direct." The funds must transfer directly from the FRS to your new retirement account. If the check comes to you first, even if you intend to roll it over, you're stuck with that 20% withholding and a 60-day scramble to complete the rollover.

Mistake #2: Missing the 60-Day Distribution Deadline

Here's a detail that catches a lot of people off guard: you have exactly 60 days from your termination date to select your distribution method.

Miss that deadline? The FRS may default to options that aren't in your best interest. We've seen cases where employees who intended to do a strategic rollover ended up with an unexpected lump sum distribution simply because they didn't complete the paperwork in time.

Sixty days might sound like plenty of time, but consider what's happening during that period:

  • You're wrapping up your career
  • You're transitioning out of the workplace
  • You might be traveling, moving, or dealing with family matters
  • Paperwork has a way of getting buried

The solution? Start planning your DROP exit at least 6-12 months before your termination date. Have your rollover accounts set up and ready to receive funds. Know exactly which boxes you're going to check on Form DP-PAYT before it even arrives.

As we discuss frequently on our podcast at www.1715tcf.com, the best financial decisions are rarely made under time pressure.

Hourglass and documents on marble, illustrating the urgency of DROP exit deadlines and financial planning

Mistake #3: Violating the Bona Fide Termination Requirement

This mistake can be absolutely devastating: and it's the one that catches the most people by surprise.

Here's the rule: to receive your DROP benefits, you must achieve what the FRS calls a "bona fide termination." This means you must sever all employment relationships with FRS employers for the first six calendar months after your DROP termination date.

Read that again. Six full calendar months. No exceptions.

What happens if you violate this rule? According to FRS guidelines, working for an FRS employer during this period may void your retirement entirely. You could potentially lose your accumulated DROP benefits and be required to re-establish membership contributions.

Let that sink in. Years of accumulated benefits: potentially hundreds of thousands of dollars: could be at risk because you picked up some part-time work too soon.

This catches people who:

  • Take a "consulting" role with their former employer
  • Get hired as part-time help at another FRS-covered agency
  • Accept a temporary position thinking it "doesn't count"

If you're planning to work in retirement (and many people do), make sure any employment during those first six months is with a non-FRS employer. Private sector jobs, federal positions, out-of-state work: all fine. Just stay away from any position covered by the Florida Retirement System until that six-month clock runs out.

The Smart EXIT: Building Your Tax-Efficient Strategy

Avoiding these mistakes is just the starting point. A truly optimized DROP exit strategy considers your complete financial picture:

Tax Bracket Management
If you have flexibility in your termination timing, consider which tax year makes the most sense. Sometimes waiting until January instead of December (or vice versa) can save you thousands.

Roth Conversion Opportunities
For some clients, rolling DROP funds into a traditional IRA and then systematically converting portions to a Roth IRA over several years can be a powerful long-term tax strategy. You'll pay taxes on the conversions, but future growth and withdrawals can be tax-free.

Coordination with Other Income Sources
Your DROP distribution doesn't exist in a vacuum. How does it interact with your pension payments, Social Security timing, your spouse's income, and any part-time work you're planning? A comprehensive wealth management approach considers all these factors together.

Estate Planning Integration
Your DROP exit is also an opportunity to review your broader estate plan. How are your beneficiaries designated on your retirement accounts? Are your documents up to date? Our estate planning tool can help you assess where you stand.

Retired couple consulting financial advisor in sunlit Florida office, highlighting smart DROP strategies

Final Thoughts

Your DROP benefits represent years of dedicated service to Florida's citizens. You've earned every dollar in that account. The last thing you want is to lose a significant chunk of it to preventable tax mistakes.

To recap the three costly errors:

  1. Taking a lump sum without considering a direct rollover (potential cost: 20-35% of your balance)
  2. Missing the 60-day deadline to select your distribution method
  3. Violating bona fide termination by working for an FRS employer too soon (potential cost: everything)

The good news? With proper planning, all three mistakes are completely avoidable.

At Davies Wealth Management, we specialize in helping Florida public employees maximize their retirement benefits while minimizing their tax burden. If your DROP exit date is approaching: or even if it's still a few years out: now is the time to start planning.

Ready to build your DROP exit strategy? Reach out to our team to schedule a conversation about your specific situation.