For all DROP participants and FRS Pension Plan members, there’s an option to roll over money from your DROP account to an FRS Investment Plan. By doing this, you can utilize the low-cost investment products in the FRS Investment Plan…but is it worth it? With this, we’re sure you have lots of questions. We’re going to answer some of the most common questions below!
1. Am I eligible?
Absolutely, every single DROP participant is eligible for this rollover. You won’t be able to take the accumulation as a lump sum, nor will you be able to convert to a lump sum before the 60-day rollover window after the distribution check date.
2. Can I roll over to the Investment Plan after taking my DROP distribution as a lump sum already?
Unfortunately, you cannot. As a former DROP participant, it’s too late to take advantage of this rollover.
3. Can I speak to anybody to learn about this rollover?
We recommend the MyFRS Financial Guidance Line, and you can reach them at 1-866-446-9377 for no charge. Go for TRS 711 (Option 2), and you will speak to an impartial financial planner.
4. Can I roll over if I took my DROP distribution as a rollover?
If you took your original DROP distribution as a rollover, you can roll over to the FRS Investment Plan. To do this, you’ll need to transfer the money from a qualified retirement account – this includes a 403(b), 401(k), 457, 401(a), and an IRA.
5. Do I need to roll over a minimum amount?
Although there’s no maximum for this rollover, you will need to transfer at least $1,000.
6. Do I need to roll my DROP accumulation to the Investment Plan?
No, the Internal Revenue Code – more specifically, section 402(c)(8)(b) – says that participants can roll over to any eligible retirement plans. We recommend weighing your options, investment options, fees, penalties, and restrictions. For extra information, read the DROP Guide from the Division of Retirement.
7. Should I maintain a balance once in the Investment Plan account?
After depositing at least $1,000, you’ll need to then keep at least $1,000 in the account. If you let the balance drop below this amount, you’ll get a mandatory distribution for the full balance.
8. Will the rollover come with any account management fees?
Depending on the funds you want to invest in, there will be certain investment management fees attached. Additionally, there’s an administrative fee of $6 per quarter ($24 over the course of a year). Don’t worry, you will see all fees shown when you receive the Investment Plan quarterly statement. Also, people in the Investment Plan tend to pay less in fees than those in other plans.
9. When rolling into the Investment Plan, does this mean I need to worry about the reemployment-after-retirement restrictions?
This is true when retiring from a pension plan, so it’s a legitimate concern when rolling over into the Investment Plan. The answer is no; you will be subject to the FRS Pension Plan reemployment-after-retirement restrictions alone. If you go back to work, this will directly impact the monthly benefit from the Pension Plan. Regardless of whether you go back to FRS employment or are retired, access to DROP accumulation is available immediately.
10. Are there any taxes that come with this rollover into the Investment Plan?
Let’s dispel a common myth: there are no taxes at the point of rollover. The only time you’ll get taxed is at the point of distribution from the Investment Plan. At this point, you only get taxed on the distribution amount…not the whole thing.
11. After rolling over, will the IRS minimum required distribution rules apply?
Yes, and this means that minimum payments will start when you reach 70-and-a-half years of age.
12. In my DROP accumulation, I purchased additional service in the pension plan. When taking DROP distributions, therefore, it means I will get two different checks. Can I roll over the two distribution amounts at the same time?
Some DROP accumulations are based on after-tax personal contributions, and this means they cannot be rolled over into the Investment Plan. Instead, you’ll get these contributions as a lump sum (this is tax-free). Thanks to the Internal Revenue Code, we have the Simplified General Rule to calculate the lump sum amount. You can only roll over funds that are based on pre-tax funds.
13. What fees come with the Investment Plan? And how many funds are available?
You can learn more about the fees and funds online, or you can call the MyFRS Financial Guideline (details listed above). In terms of funds, there are 22 unique funds with 11 retirement date funds between several asset classes.
14. My DROP participation will finish before 59-and-a-half; does this mean I have to pay the 10% early withdrawal penalty?
Normally, but some exceptions exist. Distributions from the Investment Plan are available without the early withdrawal penalty normally given by the IRS, but this only applies to those who are paid after leaving service either the year they reach 55 or after. As an employer-sponsored plan, the FRS Investment Plan follows the guidelines as such. The same is true if payments are made over joint or individual life expectancy.
15. Can I roll other retirement funds into the Investment Plan?
Yes, as long as they come from a 457, 401(k), 403, IRA, or another qualified retirement plan. To start this transfer, you’ll need to complete an FRS Investment Plan Employee Rollover Deposit Form (otherwise called an IP Rollover). Choose Option 4 on the MyFRS Financial Guideline Line or go online for the form.
16. How do distributions work from the FRS Investment Plan?
The best way to take a distribution is through the MyFRS Financial Guideline Line (Option 4) or by logging into the MyFRS portal. If you don’t have a PIN already, head online or phone the line to request one – this is needed for distribution. There are no paper forms for this process.
17. Can I rollover from a Roth IRA?
No, this is not currently an option.
18. I named a beneficiary under the Pension Plan; will this carry over to the Investment Plan?
No, we encourage you to set a new beneficiary after rolling over to the Investment Plan. Thankfully, this is easily done with a Beneficiary Designation Form (IPBEN-1) online. Without a beneficiary, benefits are paid following Florida Law. After making this change, the beneficiary remains intact for the Pension Plan.
19. What happens to funds after failing to designate an investment fund?
When you forget to choose an investment option, your money will go into the FRS Retirement Fund. There’s no need to fear because you can access your money once the account is established and you can then choose one of the 22 funds.
20. Will I get additional services from the FRS after rolling money into the Investment Plan?
Above all else, you can reach out to the impartial, fantastic financial planners through the MyFRS Financial Guidance Line. If you need help or simply have a question, they are always available. Additionally, you can adjust asset allocation easier than ever with the MyFRS website.
21. As a Special Risk member, I’m worried about the 10% early distribution tax penalty. Will this take effect if I’m under 55 and take a lump-sum distribution?
Unfortunately, you may have to pay the so-called excise tax (10%), and this is paid with your tax return. If you go over the 20% that was withheld, you’ll also need to pay other taxes, and this is your responsibility to arrange.
In case you didn’t know, any lump-sum distributions taken before 59-and-a-half trigger a 10% penalty. As well as Investment Plan distributions, this is applicable to traditional IRAs and tax-deferred IRAs.
22. I’m in the TRS (Teachers’ Retirement System); does this mean I can roll over into the Investment Plan?
Yes, you can roll over into the Investment Plan as either a former or current TRS member.
23. I’m trying to avoid the 10% tax penalty by taking equal installments before the age of 55. In this case, will I be able to adjust the payment amount a couple of years later?
Great question, and we highly recommend contacting an accountant or your tax professional. These days, these payments are complex. If you don’t get the payments set up correctly, you could be forced into IRS tax claims and other problems.
24. I’m 50 years of age now, but will I still get the 10% tax penalty after rolling over my DROP accumulation now and waiting five years to take the lump-sum distribution?
You can’t avoid the tax penalty this way; the tax penalty is applicable at the point of employment termination. Despite perhaps an IRS section 72(t) exemption, you’ll need to reach 59-and-a-half. You could avoid the penalty by taking equal and substantial periodic payments throughout your lifetime.
25. Is there paperwork involved in a rollover to the Investment Plan?
Around three months before the DROP end date, the Division of Retirement will send a DROP termination kit, and this should contain a flyer explaining how to roll over. What’s more, it will explain that EY financial planners are available to provide free, impartial advice. Once a DROP participant, fill out Form DP-PAYT (the Select Payout Method), found in the termination kit. After completing, it needs to go to the Investment Plan Administrator to sign and send it to the Division of Retirement.
The Investment Plan Administrator needs to also receive Form IPDROP-AD-1; this is the Direct Rollover Form for all current members. After setting up your account, they’ll return a welcome letter.
What if you’re a former member and have already received a rollover distribution? In this case, look for Form IPDROP-RO-1. Again, it needs to go to the Investment Plan Administrator. Once processed, you get a welcome letter, just like current members.
26. I’m a Special Risk member at 50, and I’m interested in a partial DROP distribution. I then want to roll over the remaining balance. Can Special Risk members receive distributions and still avoid the 10% tax?
The 2006 Pension Protection Act (PPA) contains a clause to avoid the excise tax when leaving service past the age of 50; this applies to QPSEs (Qualified Public Safety Employees) when using a qualified defined benefit plan to take distributions. Towards the end of 2015, the restrictions were lifted, and it no longer applied to just qualified defined benefit plans. Instead, it’s true of the FRS Investment Plan and other employer-sponsored defined contribution plans.
According to the IRS, QPSEs cover emergency medical services, police, and firefighters in a municipality or state. The list also extends to federal firefighters, customs officers, border protection, some federal law enforcement employees, and air traffic controllers. Since not all Special Risk members are considered QPSEs, you need to do some research first.
27. Let’s say I roll my DROP accumulation and then become a renewed member with FRS-covered employment. If my retirement option is the Investment Plan, can I change the beneficiary and have a different one to the DROP rollover beneficiary?
Unfortunately, all investment accounts under the Investment Plan will use the same beneficiary. This being said, you can name a different beneficiary on your Pension Plan.
28. What if I roll over and then die when the beneficiary is not my spouse?
If you were at the beginning of the process and hadn’t yet taken distributions, the beneficiary can take life installments or distributions over the next five years. If the beneficiary doesn’t decide within 12 months, distributions will be made over five years. Your beneficiary can roll any balance over to an inherited IRA (they cannot treat the IRA as their own, unlike a spouse). With inherited IRAs, all the normal rules apply, which means they can again choose between lifetime installments or five years of distributions. If no decision is made within 12 months, the latter is chosen.
Contact Information:
Email: [email protected]
Phone: 8139269909
Bio:
For over 30-years Flavio “Joe” Carreno of The Retirement Advantage has been a Federal Employee Retirement System specialist (FERS) as well as a Florida Retirement System specialist (FRS) independent advocate. An affiliate of PSRE (Public Sector Retirement Educators), a Federal Contractor & Registered Vendor to the Federal Government, also an affiliate of TSP Withdrawal Consultants. We will help you understand your FERS & FRS Benefits, TSP & Florida D.R.O.P. withdrawal options in detail while recognizing & maximizing all concurrent alternatives available.Our primary goal is to guide you into retirement with no regrets; safe, predictable, stable, for life. We look forward to visiting with you.
Disclosure:
Not affiliated with the U.S. Federal Government, the State of Florida, or any government agency. The firm is not engaged in the practice of law or accounting. Always consult an attorney or tax professional regarding your specific legal or tax situation. Although we make great efforts to ensure the accuracy of the information contained herein we cannot guarantee all information is correct. Any comments regarding guarantees, safe and secure investments & guaranteed income streams or similar refer only to fixed insurance and annuity products. Fixed insurance and annuity product guarantees are subject to the claimsâ€paying ability of the issuing company. Annuities are long-term products of the insurance industry designed for retirement income. They contain some limitations, including possible withdrawal charges and a market value adjustment that could affect contract values. Annuities are not FDIC insured.
