DROP programs

[fwest]

I'm 6 months out from retirement at age 50 and looking for anyone with experience in DROP program funds and the best way to work with them. btw I am REALLY glad I found this site as it has been very encouraging to see that there is a life after an early retirement. Ive felt like Im graduating from high school all over again with everyone asking "so what are you going to do after you retire"

 

[Alan]

Welcome to the site, and congratulations on your upcoming early retirement.

I'm not familiar with DROP programs but I'm sure someone will be along to offer some advice.

 

[Purron]

fwest - is this what you're referring to?

http://www.early-retirement.org/forums/f28/what-the-plop-is-going-on-55408.html

 

[braumeister]

I think it's probably this:
ORS State Police - Deferred Retirement Option Plan

 

[Leonidas]

DROPS are different depending on your individual program. What did you want to know about them?

 

[fwest]

I am in michigan and with the current anti govt employee movement I worried about getting my DROP monies hit hard. I want to use my DROP to fund my kids college education (GO GREEN!!) but I dont know if I trust my governor to allow me to use it as I THOUGHT I would be able to.

 

[Leonidas]

I am in michigan and with the current anti govt employee movement I worried about getting my DROP monies hit hard. I want to use my DROP to fund my kids college education (GO GREEN!!) but I dont know if I trust my governor to allow me to use it as I THOUGHT I would be able to.

A new mayor with a sharp budget axe caused a lot of uncertainty when I retired. Rather than taking the risk I opted to roll my DROP balance over to an IRA at Fidelity. It's out of their hands, but now the investment manager I curse when returns are lackluster is me.

 

[Nords]

... but now the investment manager I curse when returns are lackluster is me.

At least you know that your investment manager's interests (and welfare) are aligned with yours...

 

[Leonidas]

At least you know that your investment manager's interests (and welfare) are aligned with yours...

True, but some days I think he is dodging my calls!

 

[utrecht]

My DROP plan pays a guaranteed minimum of 8% interest so it wouldn't make any sense to roll it into an IRA. The DROP funds in my plan are held in a seperate account within the pension fund which cant be accessed by anyone other than me. So, in short the answer is "it depends". Depends on the rules of your plan.

How is your DROP money going ot be hit hard? Do they have some way of taking your money if they reduce benefits? That wouldnt be legal in Texas, but I have no idea how it works in Michigan.

 

[fwest]

There is talk about a separate "windfall" tax for accounts like this. This is separate from my pension also, and they are now going to be taxing my pension.......which Ive already paid taxes on the monies ive put in.....scary times in the mitten state, paying for Detroit.

 

[Leonidas]

There is talk about a separate "windfall" tax for accounts like this. This is separate from my pension also, and they are now going to be taxing my pension

You don't have DROP problems, you have taxation problems. Or, perhaps you have some residency issues that might be corrected by a move out of the frozen wastelands.

I wish I had a guaranteed interest rate like them boys up in Dallas. My plan pays an interest rate based on a rolling 5-year average of the pension plan's rate of return. At the time I retired we had already opted out of the law that Utrecht references and so our benefits were definitely up for negotiation. The new mayor came in and said his budget could support pay-raises or the pension plan increases, but not both. The pension board members I knew said it couldn't be done under the existing law, but nobody knew if the new mayor had sufficient suction in the legislature to get such things done without negotiations. So, I left a 7% interest rate behind and sucked my money out of the pension system and into the loving arms of FIDO.

In the end, the mayor and pension board negotiated some reasonable changes to the program that made it healthier and the cuts were not too drastic. But I was already gone by then, and I needed to put my money in an IRA for federal tax reasons (I was 45 and thought I might want to make early withdrawals).

Since then the DROP/PROP rolling interest has declined and my ROR on the IRA has increased. But there were times that I was convinced I was an idiot for making the move. I've got 7 years before I could make any withdrawals without a 72(t) exception to the penalties, so I guess we will have to compute the difference at some later point. At the moment I am winning, but barely.

If I were in your position I would be worried about how much of my money the politicians want to suck back in their efforts to unscrew their problems. In the eyes of Joe Public the average government worker with a pension is not looking very good right now, and the weasels might find a lot of sympathy among the public for taxing your pension and DROP.

 

[travelover]

......... and they are now going to be taxing my pension.......which Ive already paid taxes on the monies ive put in.....scary times in the mitten state, paying for Detroit.

I also live in Michigan and will be affected by the resumption of taxing pensions in 2012. I am not taxed on the portion of the pension that I have contributed. I believe that this subportion is spelled out on your 1099R form.

 

[GregLee]

I am not taxed on the portion of the pension that I have contributed.

I thought I would not have to pay Federal tax on the portion of my state pension that I had contributed. But it turns out that would only apply if I had paid income tax on those contributions. I didn't, so now I have to pay Federal income tax on the full amount of my pension. I'm not saying this matters for you -- just noting there might be a potential problem here.

 

[Leonidas]

I think that the situation in Michigan is a state income tax change:

Snyder was also able to secure a controversial measure to extend the state's income tax to pensions, a move the governor said would bring $343 million in new revenue during the coming fiscal year. Public employees, who stand to lose about $90 million of the $343 million total, reacted with outrage. The Michigan State Employees Association promised to file a lawsuit to block the pension tax provision, arguing that taxing state employee pensions violated the constitutional prohibition against "impairing or diminishing a vested public pension." Snyder beat employees to the punch, asking the state supreme court to issue an advisory opinion on the issue by October 1.

Most of my pension contributions were pre-tax, but in the 70's and early 80's they were made with post-tax money. When I retired they just gave me a check for my contributions that were made with money already subject to tax, and my 1099s reflect a gross distribution and a taxable distribution that is lower.

Here's something I find funny - If I moved to to Michigan my pension would not be taxable under the state's income tax system.

The following states allow a deduction or exemption for their residents who receive Michigan public pension. Therefore, Michigan will allow a deduction for the full amount included in adjusted gross income (AGI) for Michigan residents receiving public pension from these states:

(Alaska Illinois Nevada South Dakota Washington Florida Massachusetts New Hampshire Tennessee Wyoming Hawaii Mississippi Pennsylvania Texas)

If a Michigan taxpayer earned a public pension from a state or its municipalities that are not listed above, then the pension is subject to the same subtraction limits that apply to private pensions. For tax year 2010 those limits are $45,120 on a single return and $90,240 on joint return

Do those same limits apply to the Michigan government pensions? If so, that 90K figure seems generous.

 

[travelover]

.....................Do those same limits apply to the Michigan government pensions? If so, that 90K figure seems generous.

This changes in 2012 because of the legislation referred to in your first quote. It gets even odder, breaking citizens into three classes as defined here:

http://www.freep.com/assets/freep/pdf/C4172979412.PDF

 

[Leonidas]

This changes in 2012 because of the legislation referred to in your first quote. It gets even odder, breaking citizens into three classes as defined here:

So it's only if you were born before 1946 that you get those nice deduction.

To you and/or the OP: Were the pension contributions taxed by the state or is it all pre-state-tax money?

 

[obgyn65]

Welcome, fwest.

 

[travelover]

So it's only if you were born before 1946 that you get those nice deduction.

Currently government pensions are untaxed, private pensions have the generous limits. After January 1, 2012 only those born before 1946 keep this sweet deal. I am in the middle getting to keep some exemption. DW is younger and falls into the SOL group.

To you and/or the OP: Were the pension contributions taxed by the state or is it all pre-state-tax money?

I don't know about the OP, but my contributions (small) were pretax.