Despite genome-wide association studies of late-onset Alzheimer's disease (LOAD) having identified many genetic risk loci1-6, the underlying disease mechanisms remain largely unknown. Determining causal disease variants and their LOAD-relevant cellular phenotypes has been a challenge. Leveraging our approach for identifying functional GWAS risk variants showing allele-specific open chromatin (ASoC)7, we systematically identified putative causal LOAD risk variants in human induced pluripotent stem cells (iPSC)-derived neurons, astrocytes, and microglia (MG) and linked PICALM risk allele to a previously unappreciated MG-specific role of PICALM in lipid droplet (LD) accumulation. ASoC mapping uncovered functional risk variants for 26 LOAD risk loci, mostly MG-specific. At the MG-specific PICALM locus, the LOAD risk allele of rs10792832 reduced transcription factor (PU.1) binding and PICALM expression, impairing the uptake of amyloid beta (Aβ) and myelin debris. Interestingly, MG with PICALM risk allele showed transcriptional enrichment of pathways for cholesterol synthesis and LD formation. Genetic and pharmacological perturbations of MG further established a causal link between the reduced PICALM expression, LD accumulation, and phagocytosis deficits. Our work elucidates the selective LOAD vulnerability in microglia for the PICALM locus through detrimental LD accumulation, providing a neurobiological basis that can be exploited for developing novel clinical interventions.