FRS DROP Payout Option 3 – The "Alaskan Cruise" Option
The third FRS DROP payout option is the partial lump sum option, or as we like to call it the “Alaskan Cruise” Option.
This option is a combination of options 1 and 2. You let the FRS know how much you’d like to be sent to you as a distribution and the rest of the money is rolled over to whatever qualified account you’d like.
This option is chosen for any number of reasons, but some of the more popular reasons that we see are:
- Vacation (Hence the “Alaskan Cruise Option” name. That seems to be by far the most common trip that our clients take after retirement.)
- Paying off high interest debt (credit cards, loans, etc.)
- Purchase of Vehicle
- Boost amount in savings
- Payoff a small mortgage
Remember that you’re taxed based on what you take out, not what you receive. Meaning that if you want to receive $10,000 you have to take out $12,500. ($12,500 – 20% tax withholding = $10,000)
Also remember that your first pension check will not come until the month after you separate from service. So if you don’t have enough in checking/savings to pay for the next month’s bills, you may want to consider taking out partial distribution to get you to the end of the month.
Remember, any amount the you elect to have paid to you as a distribution is taxable. Meaning that it will be added onto your income for the year that you take the distribution, which may put you into a high tax bracket, and the 20% is just the withholding amount – you may owe more in taxes at the end of the year or you may get a refund. Please consult a tax and/or financial professional if you’re considering the “Alaskan Cruise” Option.
We created step-by-step instructions on how and when to fill out your FRS D.R.O.P. forms or other FRS Retirement forms. You can view them on our Youtube page here.