Most people have filed their federal tax returns by now, and many of them have already spent the money received. While refunds are tremendous and spending them for what a person wants is lovely, it’s the money you end up owing and more that costs more than just the money you have to give. It’s a wounded pride that is coupled with a penalty and higher tax payment.
Did you know that your withdrawals from the TSP could be the reason for the federal income taxes you have to pay on? Although there are some exceptions, taking roughly equal payments each month constitutes a withholding of federal taxes like you are married, filing a joint return and have three dependents you are claiming.
This not near enough withholding to cover TSP withdrawals. If 90 percent of the taxes owed is not paid for by the end of the year, you will pay a 10 percent tax penalty. This 10 percent is the difference between what was withheld and the 90 percent amount.
If this is happening to you, consider increasing how much you withhold on the TSP withdrawals, by preparing the W-4P form (Withholding Certificate for Pension or Annuity Payments) and give it to the TSP. The form can be downloaded in the “forms and publications” category on the Internal Revenue Service’s website.
To stay current on the latest TSP tax rules, read Tax Information: Payments from Your TSP Account. You can find this on the TSP website under the forms and publications category.
Something else to keep in mind: if you’ve been deployed at any time and contributions was made to the traditional TSP from any tax-exempt income, some of the future withdrawals are based on these contributions that were not taxed when you withdrew them.
To learn more about your TSP withdrawal options, click here.