How Are TSP Withdrawals Taxed?

In this article, we cover how TSP withdrawals and rollovers are taxed.

If you’re wonder “How Are TSP Withdrawals Taxed?” – you’ve come to the right place.

When taking money out of the Thrift Savings Plan (TSP), several factors impact how the IRS taxes the funds. In this article, we’ll explore the key points to understand before making a withdrawal or rollover. For information about TSP loans, check out this article.

Traditional vs. Roth

For traditional (non-Roth) contributions to your TSP account, taxes have yet to be taken. When making a qualified (age 59½ or older) withdraw from a traditional TSP account, the funds are taxed as ordinary income. Taxes can be deferred by rolling over the money to a traditional IRA or an eligible employer plan. Non-qualified withdrawals will add a 10% IRS penalty on top of the taxes due.

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Roth TSP contributions are made post-tax. No taxes are owed when receiving a qualified withdrawal. For Roth TSP money, qualified means the account must have been opened and funded for at least five years and for the earnings, the TSP participant must be 59½ or older (or disabled) to avoid the 10% IRS penalty. Only the 5-year rule applies to the contribution portion.

Other Factors to Consider

How are TSP withdrawals taxed? Make sure you understand the following factors:

Uniformed Services TSP Accounts: Contributions from combat zone pay are not taxable when withdrawn, but earnings on those contributions are subject to tax.
Special Provisions Employees: The Defending Public Safety Employees’ Retirement Act (P.L. 114-26) permits certain federal law enforcement officers, customs and border protection officers, federal firefighters, and air traffic controllers, who separate from service at age 50 or later, to withdraw from the TSP without a 10% early withdrawal penalty. This law applies to TSP withdrawals made after Dec. 31, 2015. Employing agencies and services are responsible for identifying eligible public safety workers.
TSP Annuity: Upon retiring, a federal employee may purchase a TSP annuity. Taxes on traditional contributions and earnings are deferred until annuity payments are disbursed. Roth contributions in the annuity are not subject to taxes.

TSP Withdrawal Options

Whenever money is disbursed from the TSP, it is important to have a strategy includes optimizing tax efficiency and preserving one’s retirement savings. Here some helpful tips:

Avoid “total distributions” as this could incur unnecessary taxes.
The lifetime annuity option might not be the most tax-efficient choice.
Partial and automatic withdrawals can help minimize tax liability.

** How are tsp withdrawals taxed? written by Benjamin Derge, Financial Planner, ChFEBC℠ The information has been obtained from sources considered reliable but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Benjamin Derge and not necessarily those of RJFS or Raymond James. Links are being provided for information purposes only. Expressions of opinion are as of this date and are subject to change without notice. Raymond James is not affiliated with and does not endorse, authorize, or sponsor any of the listed websites or their respective sponsors.

***The Thrift Savings Plan (TSP) is a retirement savings and investment plan for Federal employees and members of the uniformed services, including the Ready Reserve. The TSP is a defined contribution plan, meaning that the retirement income you receive from your TSP account will depend on how much you (and your agency or service, if you're eligible to receive agency or service contributions) put into your account during your working years and the earnings accumulated over that time. The Federal Retirement Thrift Investment Board (FRTIB) administers the TSP.***