By Mike Miles
July 9th, 2012 | Uncategorized
Q. I just separated from the military and have an outstanding loan. I recently mailed in the “intent not to repay” form. How long will it take for the Thrift Savings Plan to claim a taxable distribution and close out the loan? Also, if the entire sum of the loan was accrued in a tax-free combat zone, will they still tax the remaining balance?
A. I checked with the TSP, and it should take one to two weeks for TSP to declare a taxable distribution once it receives an “intent not to repay” notice. Only the outstanding loan principal and interest will be reported to the Internal Revenue Service as income. To the extent that the loan principal is attributable to combat-zone contributions, that portion is not taxable. However, the interest on the amount of the loan principal that is attributable to combat-zone contributions is taxable. Loans are distributed pro rata from taxable and nontaxable amounts. The only way that the entire sum of a loan could be attributed to combat-zone contributions is if the account balance consisted only of combat-zone contributions and no interest had accrued.