Ask The Experts: Money Matters

By Mike Miles

TSP withdrawal and terminal illness

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Q. I was approved for disability retirement in November under FERS due to my diagnosis of a malignant, incurable brain cancer (my life expectancy is six to nine months). I withdrew my Thrift Savings Plan in lump sum ($29,000) to pay my medical and living expenses. I am including my TSP distributions in my tax return. If I understand correctly, my TSP money should be added to my earned income (for example, if I earned $50,000 + $29,000 TSP =$79,000 total year of 2012 income) and it will be taxed as ordinary income. Is there any way for a terminally ill person to exclude this TSP amount from my gross income tax return category? Because I am separating from service during or after the calendar year in which I reach age 55, no early withdrawal penalty will apply.

A. I’m not aware of any exception to the tax imposed on TSP withdrawals for a terminal illness. You should consult a CPA in your state for specific tax advice.

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