Are there any income tax consequences to my entering DROP?

Yes. The distribution of your DROP account is subject to federal and state tax laws in effect at the time you receive your distribution. You may defer income taxes by rolling over 100 percent of your taxable DROP account proceeds into a tax-qualified plan or to an IRA. We encourage you to consult with your personal tax advisor both before you enter DROP and before you exit DROP.

Social Security Fairness Act of 2023

On January 5, 2025, President Biden signed into law the Social Security Fairness Act of 2023 (H.R. 82), which repeals two long-standing federal laws: the Windfall Elimination Provision (WEP) and the Government Pension Offset (GPO). These provisions reduced Social Security payments for recipients of other benefits such as a pension from state or local government, impacting almost three million individuals, including some LAFPP retirees and beneficiaries. 

Please contact the Social Security Administration at (800) 772-1213 or visit their Web site at www.ssa.gov for updates or questions.

Deferred Compensation

You can withdraw funds from your Deferred Compensation account once you retire or exit DROP. There are no age restrictions or early withdrawal penalties for taking money from your before-tax funds. However, withdrawals from before-tax funds are taxed as ordinary income.

If you rolled over, or plan to roll over, your DROP funds into the City’s Deferred Compensation Plan, you are eligible to take distribution of those funds without an early withdrawal tax penalty, if you are at least age 50. This also applies to distributions taken directly from LAFPP.

You should keep in mind that you may incur a tax liability upon distribution.

For more information, please contact LA City Deferred Compensation website directly.