Ask The Experts: Money Matters

By Mike Miles

TSP taxation

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Q. Are all TSP withdrawals subject to the 20-percent federal tax withholding, including full withdrawal by way of monthly payments? And is this done automatically when you set up your payout options with TSP or do you need to complete a form?

A. Not all TSP withdrawals are subject to mandatory withholding. See the table on Page 3 of the notice at https://www.tsp.gov/PDF/formspubs/tsp-536.pdf for the rules. Mandatory and default withholding happens automatically. Anything else, you’ll have to request.

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TSP residential loan

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Q. What happens if the down payment made is less than the amount of a TSP residential loan? Would the borrower have to claim the difference as a withdrawal and pay the penalty and claim as income?

A. I don’t believe that there is a requirement to commit the entire loan to the down payment, but you should consult your tax preparer to be sure.

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IRA requirements

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Q. I have three IRA accounts and I turned 70 in March. Do I combine the three to figure the required withdrawal? What would the tax  be if I do a lump-sum withdrawal from all three?

A. You must obey the aggregations rules for calculating your IRA RMD spelled out in IRS Publication 590. The taxable portion of each withdrawal will be added to your tax return as ordinary income for the year, where the tax you owe on the withdrawal will be calculated. Whoever prepares your tax return for the year of the withdrawal is responsible for making sure that it is done right.

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Early retirement penalty

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Q. I am 50 and I retired as a firefighter (Special Category) on Dec. 31, 2013, with 25 years and 10 months of service. I want to withdraw my TSP but I’m being told by TSP that they withhold 20 percent for taxes and my accountant is telling me that I will have to pay 10 percent for a penalty because I retired early. I looked into the IRS publications 575 and 721 and they state I don’t get charged a penalty. Read the rest of this entry »

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Tax withholding

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Q. Is there a way I can get federal taxes deducted from my TSP withdrawals. I am currently receiving a monthly payment.

A. Yes. Use form TSP-78: https://www.tsp.gov/PDF/formspubs/tsp-78.pdf.

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Withdrawal fees

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Q. I want to pay off a few student loans before I retire from the military. I want to use my TSP to do so. Should I convert my TSP to a Roth IRA so I can avoid the heavy withdrawal fees?

A. There are no fees for withdrawing money from the TSP. All withdrawals from the TSP (except contributions you made from tax-free combat pay) will be subject to income taxation and, unless you qualify for one of the exceptions listed on Page 7 of the notice at https://www.tsp.gov/PDF/formspubs/tsp-536.pdf, any withdrawal you take before reaching age 59-1/2 will be subject to the IRS’ early withdrawal penalty. You should seek advice from a CPA before proceeding with this. You might want to consider taking a TSP loan to pay off the student loans, instead.

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Annuity investment

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Q. I am a retired federal employee since July 1, 2011. Because of the IRS rules regarding RDA if you’re 70-1/2 years old. I decided to withdraw an annuity of $1,500 each month. What is the best investment as to where to put my $1,500. By the way, this amount is below the 4 percent commonly used by retirees as a yardstick.

A. You should invest the money in the safest place that is highly likely to produce a sequence of periodic investment returns that will support your future financial goals. If you’re not sure what that is, I suggest that you put the money in the bank and contact me for help.

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Social Security reduction

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Q. I’ve read about the Social Security reduction if your income is above a certain amount. Does the calculation for that amount include the FERS pension and TSP annuity payments? In other words, does the Social Security Administration consider my pension and TSP payout to be “income” they will reduce against? Or is the reduction only against “wages” from actual employment income after you reach Social Security retirement age? Read the rest of this entry »

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Partial withdrawal

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Q. I want to make a one-time partial withdrawal from my TSP account. I realize this withdrawal is subject to the Virginia state and federal income taxes. Who should I contact to learn how much taxes, both federal and state, I have to pay?

A. The withholding requirements are listed in the table on Page 3 of the notice at https://www.tsp.gov/PDF/formspubs/tsp-536.pdf. You won’t know how much tax you’ll actually owe until you file your tax returns for the year, however.

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Taxation on TSP

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Q. How much is the TSP taxed upon retirement if pulled out all at once, and how does that affect you’re end-of-year taxes at the end of that year?

A. Your withdrawal will be subject to a 20 percent mandatory federal tax withholding and the amount of your withdrawal will be added to your tax return for the year as ordinary income. The withholding is considered a deposit against your federal tax liability for the year.

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