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