Tax Penalties for a Withdrawal From a TSP After Leaving
Federal employees are eligible for many kinds of retirement savings plans. One option available to both civilian and military workers is a thrift savings plan. It's not designed as a primary retirement savings plan, but rather as a supplement to other retirement options. While thrift savings plans benefit most federal workers, tax penalties kick in when you separate from federal employment and withdraw your money.
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Thrift Savings Plans
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A thrift savings plan lets you put money into a retirement savings account without paying taxes on the money from your salary or wages. Taxes are removed when you withdraw your money from the TSP. If you choose, you can take a loan from your TSP for 5 years; if you use the money to purchase a home, the loan can be paid back over 15 years. All loans are paid back with automatic deductions from your paychecks. The amount of money you decide to place in your TSP should be entered as a percentage of your pay on form TSP-U-1. Your employer will give you the form when you are offered the plan.
Withdrawal Options
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If you've been a federal employee in the past and change employment, you can keep your TSP, but you may not be allowed to contribute more funds. You can withdraw the money before you turn 59 1/2, but there's a penalty. If you leave the funds in the account until you're 59 1/2, there is no penalty. Once you decide on a withdrawal, you can take it in a single payment, as a series of payments over your lifetime or in a series of payments in a specific amount. Different tax structures apply to each type of withdrawal. If you take payments over less than 10 years, you are taxed at the eligible rollover distribution rate. If you take them over more than 10 years, you are taxed on the basis of periodic payments.
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Penalties
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Any employee who withdrawals from a TSP before he is 59 1/2 will incur a penalty. If you are 70 1/2 you must withdraw the entire amount by April of the year after you are no longer a federal employee. If you withdraw money at any other time, you incur a penalty. The penalty is 10 percent of the money you withdraw. That could be more than you earned in interest in a single year. If you want to avoid a penalty, transfer your TSP to an eligible IRA. Roth IRAs may also save you from severe withdrawal penalties, but you will still have to pay transfer taxes.
Tax-Exempt Pay
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Serving in the military in a combat zone entitles you to the combat zone tax exclusion. This means that money earned in a combat zone never incurs federal taxation. If you place money from combat pay into your TSP, it won't be taxed when you withdraw it, but non-combat zone pay contributions will still be taxed. Your money will be shown on official documents as both taxable and non-taxable savings and will be distributed as such.
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