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Top 10 Fire Fighter Financial Questions

Top ten financial questions for Firefighters/Paramedics

1. Which pension choice is best for me?

This depends on your personal situation. Here are some of the questions that you should ask yourself before the best choice can be made:

- Are you single or married?
- Do you have dependent children?
- How much are your daily, monthly, and annual expenses?
- Do you have other financial accounts?  If so, what are the types and amounts of those accounts?
- Are you going into the drop?

2. Is the DROP (Deferred Retirement Option Program) a good choice?

In most cases the drop is a good choice.  When you have a drop account you can roll it over to several other types of accounts with no tax implications or take distributions when needed.  This account, depending on your individual situation, could be worth several hundred thousand dollars at retirement.

3. Should I take the lump sum, a.k.a. the investment plan in the FRS?

This depends on your personal financial situation including your spending plan in retirement.  For example, if you can pay your bills now and into the future with a 4 to 5% distribution from your lump sum, it might be a good choice.  However keep in mind the risk is now on you for your future paycheck, not on the state of Florida for your municipality.  There are other special situations that you need to consider.

- The entire amount is not released to you upfront.
- you will need to factor in the special tax considerations that are affected by your age and choice of where your money is invested.

4. Will the legislature change things in the future?

The only thing constant is change.  Understand that when things change, they usually change slowly.  Here are just two possible contingencies to consider as part of your overall planning:

- what if the DROP is eliminated?
- what if they change the pension?

These and several other contingencies should be part of your overall planning.  Remember, if you plan early properly, you can minimize the effects of each of these possibilities.

5. Should I use the DROP money to pay off my mortgage?

If you take a large DROP distribution when you retire, you will have to add it to your annual income from that year and you will be taxed at that rate.   Consider the following example:  if you make $50,000 and take $100,000 distribution to pay off your mortgage, your new total income for the year is now 150,000.  Your new gross income of 150,000 could bump you up one or two tax brackets.  In a nutshell, if you want to save on taxes you may want to consider taking smaller amounts overtime and still accelerate the payment of your mortgage.

6. Can I avoid the 10% penalty on my DROP or investment plan distributions?

It depends.  If you're under age 59 1/2 at the time of your drop distribution from the FRS, the amount that you receive as a direct payment avoids the 10% penalty.  If you rollover any portion to another qualified account, upon distribution from the account you will incur a 10% penalty until age 59 1/2 in most circumstances.

At the time of termination from the investment plan, if you're at least 55 or will be age 55 during that calendar year, the distributions you take directly from the investment plan will avoid the 10% penalty period If however, you rollover any or all of the investment plan account to another qualified plan, you will have to pay the 10% penalty in most circumstances until age 59 1/2.

There is a special IRS tax provision called the section 72 T and 72 Q, which might allow you to avoid the penalty on withdrawals.  For this provision you should see a qualified tax professional.  If you fail to follow the rules you could be ineligible for the savings.  For special risk members:  another qualified provision that might help you with your planning comes from the Pension Protection Act of 2006

7. What are the choices for my DROP money?

There are several, and the one that is best for you depends on your personal financial situation.  To avoid taxes, the DROP money is commonly rolled over to an account and invested in mutual funds, stocks, bonds, CD's, or cash.  The funds are usually invested through:
-FRS investment plan accounts
-403(b) and 457 deferred compensation plans

Each of these choices has advantages and disadvantages.  An in-depth analysis should be done to make sure you select the right one for your situation.

8. Should I start Social Security at age 62?

For most people, the answer to this question is yes.  Of course, this depends on your individual financial situation.  An in-depth analysis should be completed to determine your breakeven point (when the two totals are equal).

For example, if you start at age 62 and receive $1000 per month instead of waiting until age 65 when you receive $1300 a month, assuming no gains or losses, your breakeven point will be age 74.

9. Can I take Option One and purchase a term policy for my spouse?

Short answer.... yes.  However, if you're uninsurable after the term policy ends, you cannot get another policy.  In addition, after certain ages, usually between 75 and 80, insurance companies will not issue affordable term policies.  This could leave a dependent spouse without the income needed to maintain his or her lifestyle.  If you purchase term now and wait to convert it to a permanent policy in your later years, it will be very expensive. 

10. When I choose my pension option, will it affect my DROP account?

Yes. Your DROP account will be the highest if you choose Option One.  For a regular class employee the difference might be $20,000 to $50,000.  Special risk maybe $30,000 to $80,000.  This is very important consideration before you choose your option.  If you're healthy you will want to consider the pension income alternative.