Federal Employees: Have you made Tax Considerations for TSP?
TSP Tax Considerations
Understanding the tax treatment of Thrift Savings Plan (TSP) payments can help federal employees avoid making costly mistakes. The rules governing distributions from your TSP are complicated and the tax treatment of TSP Annuity is also complex, it is important to be informed and knowledgeable about the various TSP tax regulations. Tax rules vary depending on which method you opt for as you access your money or as you roll your TSP into an IRA and then subsequently withdrawal money in the future.
TSP Rollovers
If you opt for a TSP to IRA rollover, you withdrawal money from your TSP and deposit those funds into your traditional IRA or eligible employer plan. If you elect to receive the funds directly, instead of making a direct rollover, you have 60 days to re-deposit the funds into a qualified plan (like a 401k) or IRA.
Therefore, if you rollover your entire TSP balance, you will not owe any immediate taxes on the amount you move from plan to plan (TSP to IRA for instance). However, should you rollover only a portion of the money in your TSP and receive the remaining portion in a TSP distribution, you will owe taxes on the amount not rolled into your IRA.
TSP Withdrawals
Should you wish to withdrawal some of your savings from your TSP to make those funds available for living expenses, 100% of these withdrawals will become subject to Federal income tax, and might also be subject to a 10% early withdrawal penalty tax if the recipient is not yet 59 1/2 years old.
There are methods to withdrawal funds from your IRA designed to avoid these penalties and the rules governing the distributions from you TSP also take into consideration the potential need of a recipient to access these funds. – Generally the TSP is more generous with regard to the withdrawal options available. You should consult with your own financial professional before making any TSP withdrawal decisions to ensure you fully understand the impacts.
Note: The TSP cannot accept transfers from Roth IRAs.
