So far in this series, we have covered the basics of the Thrift Saving Plan, employee and agency contributions, the differences between Traditional and Roth TSP accounts, loans, in-service and post-separation withdrawals, and life annuities. This post focuses on taxes of post-separation withdrawals and IRS withdrawal penalties.
Taxes of Post-Separation Withdrawals
No matter which type of withdrawal you make, taxes are always imposed.
With post-separation withdrawals, you must pay federal income tax on the taxable portion of the withdrawal when they are paid directly to you. You still owe taxes on the portion of your withdrawal that comes out of your Traditional balance (excluding any tax-exempt contributions).
However, you will not pay federal income taxes on the portion of your withdrawal that comes from Roth contributions, and you only pay taxes on earnings if they aren’t qualified.
Depending on your age when you leave federal service, along with your withdrawal option and timing, you may be subject to the IRS early withdrawal penalty tax.
If you are separated from federal service or uniformed service, you are required to make a withdrawal choice for your TSP account balance by April 1st of the year following the year you turn 70 ½.
If you are still employed at age 70 ½, your required withdrawals must begin by April 1st of the year following the year you separate from federal or uniformed service.
TSP will forfeit your account balance if you don’t withdraw, or begin to, by the required withdrawal deadline. You may reclaim your account, but you will lose out on earnings you would’ve received.
IRS Required Minimum Distribution
At the same deadline as mentioned above, you will also be subject to IRS Required Minimum Distribution rules. These rules require you to receive a certain portion of your account each year based on your life expectancy.
Automatic Enrollment Refunds
If you were automatically enrolled in TSP, you may request a refund of employee contributions (plus earnings or minus losses) associated with the automatic enrollment period. If you make a contribution election to change your automatic contributions in any way, you are no longer in the “automatic enrollment period” and you can’t request a refund of contributions you made after the change.
Your request must be made within 90 days of your first automatic enrollment contribution. You’ll receive a refund of your own employee contributions and earnings. If you are FERS, you do, however, forfeit all Agency Matching Contributions to your account when your refund is processed. Those Agency Automatic (1%) Contributions will remain in your account.
Note: Requesting a refund of automatic employee contributions will not stop your agency from deducting future contributions from your pay each pay period. If you want this to stop, you must elect to do so.
Exceptions to the IRS Early Withdrawal Penalty
This 10% penalty doesn’t apply to payments that are:
- Received at age 59 ½ or later
- TSP monthly payments based on life expectancy
- Received after you separate/retire during or after the year you reach age 55 (or the year you reach 50 if you are a public safety employee)
- Lifetime annuity payments
- Ordered by a domestic relations order
- Made from a beneficiary participant account
- Received because of total and permanent disability
- Made because of death
- Received in a year you have deductible medical expenses that exceed 10% of your AGI (7.5% if you or your spouse is 65 or older)
- Received by military reservists called to active duty for at least 180 days
The final post in this series will look at how a non-pay status affects TSP contributions, loans, and withdrawals.
Harris Federal Law Firm helps federal and Postal employees nationwide with federal disability retirement cases. If you have an injury or illness that keeps you from performing your essential job duties, you may qualify for Federal Disability Retirement. Give us a call at 877-226-2723 or fill out this INQUIRY form today.