In its simplest form, DROP (Deferred Retirement Option Plan) is a unique State of Ohio benefit that allows eligible police officers and firefighters the option to accumulate a lump sum of money for retirement on a tax deferred basis during their working years.
The benefit calculations are somewhat complex and there are also specific qualifications and restrictions. Specifically, you must be at least 48 years of age with at least 25 years of service to be eligible; DROP contributions can only be made for 8 years; and, you must be enrolled in DROP for at least 3 years to obtain the full benefit of DROP.
One thing you really need to remember: you will need to buy back all prior years of service before entering DROP. Once you are a DROP participant, or have completed your DROP participation, you cannot buy back years of service.
DROP also has a few interesting twists. DROP is a unique program that allows Ohio Police and Firefighters to accumulate that which would be difficult to accumulate anywhere else, particularly given the protection of principal. On the other hand, if you get promoted and obtain pay increases during the DROP years, the value of your pension is frozen at the level achieved prior to entering DROP. Other than COLA adjustments, all raises received are not eligible to be included in final pension calculations. One important way to help your situation is to take all the overtime opportunities available prior to entering DROP to build up your average salary.
Then there is the matter of taxes and penalties. A designated DROP lump sum can generally be rolled over into a traditional qualified Individual Retirement Account (IRA), so that no taxes are due on these funds until you actually withdraw them. You may also be able to roll the distribution into a Roth IRA which requires a taxable conversion at the time of the rollover.