By Mike Miles
Disability and tax deduction from TSP funds
May 6th, 2013 | Uncategorized
Q. I recently retired from the federal government due to becoming permanently disabled at age 61. I received my disability approval from the Social Security Administration. I withdrew a portion of Thrift Savings Plan funds to cover expenses as a result of not being able to work. Why was 20 percent tax deducted from the distribution of funds at age 61 and with the legal purpose of being disabled?
A. Because that is the default federal income tax withholding rate for the distribution. The money has been applied toward your tax liability for the year.
Tags: age, deduction, Disability, distribution, Social Security, taxes, TSP, withholding rate
Tax withholding
January 16th, 2013 | Uncategorized
Q. I am a military member retiring in January 2014. I will have approximately $57,000 invested in my Thrift Savings Plan account when I retire. If I decide to withdraw my account in one lump sum, how much will I pay in taxes? I’ve heard that I would be taxed up to 30 percent of my balance at time of withdrawal, which would leave me with about $39,900 after taxes. Is this accurate?
A. Your check will be reduced by 20 percent for mandatory federal tax withholding. This is just a deposit against your federal tax liability, however, which you won’t determine until you file your tax return for that year. You may also owe state income tax on the distribution.
Tags: distribution, lump-sum, military, retirement, taxes, TSP, withdrawal, withholding rate
Mortgage and taxes
January 14th, 2013 | Uncategorized
Q. I turned 62 in December. I am 100 percent disabled from combat wounds. I worked federally for a while and saved $102,000 in a G Fund under FERS. I’m about to start losing my home as my wife will have to retire this year. Without her income, we won’t be able to afford the mortgage (but no credit card or other debt on the house.)
What percentage at age 62 does a 100 percent disabled vet have to pay when withdrawing savings in full? I think it’s stating 20 percent, but that doesn’t seem reasonable. Am I reading it wrong? I want to pay down my home and refinance to lower the payment to keep from going into default and losing it. It’s all we have, and with the market crash, we lost what equity we had in it. We both have AAA credit scores (low 800s) and have held on as long as we can, but the recession and times have finally caught up to us.
Can you explain what would be the best way to pull the money out in full so I can pay off my mortgage and keep my home?
A. While you may wind up owing less when you file your tax return, there will be 20 percent withheld from your distribution against your federal tax liability.
Tags: Disability, distribution, FERS, G fund, income, mortgage, retirement, spouse benefits, taxes, withdrawal, withholding rate
TSP withdrawal and taxes
January 7th, 2013 | Uncategorized
Q. I recently asked to withdraw my Thrift Savings Plan account. I understand that they automatically withhold 20 percent of the balance. I live in Pennsylvania and was wondering if I will have to pay more taxes even though TSP withheld the legal limit of the 20 percent. I am trying to figure out if I should be expecting a bill from the Internal Revenue Service once I file my taxes for 2012. Maybe I’m overthinking this, but I’m trying to buy my first house and heard rumors that the money can be used for this without penalty.
A. The 20 percent withholding is only a deposit against your federal tax liability, which won’t be calculated until you file your tax return for the year. The only way to know how much you will owe, or be refunded, is to file your return. If you’re concerned about a tax bill in April, you’ll need to run your tax return for the year to see the result.
Tags: IRS, taxes, TSP, withdrawal, withholding rate
TSP payments, withholding rate and tax liability
July 24th, 2012 | Uncategorized
Q. I will retire this year at age 70 and will request one on the following: 1.) monthly payments for 10 years or more, or 2.) monthly payments based on the Internal Revenue Service’s life expectancy table. My withholding rate will be the same as if I were married with three children but at what tax percentage? Let’s say my annual payout is $10,000. What is my annual tax liability as it pertains to Thrift Savings Plan payments? Will I be paying less than 10 percent?
A. The default withholding rate is not fixed and will depend upon the amount of the distribution. You can use the instructions in IRS Circular E (http://www.irs.gov/publications/p15/ar02.html#en_US_2012_publink1000254686) to estimate the default withholding rate for your monthly withdrawals. You should note that you may request a high or lower withholding rate, or waive the withholding altogether. Also, keep in mind that withholding and your tax liability are two separate things.
Tags: IRS, retirement, taxes, TSP, withholding rate
Lump-sum TSP withdrawal and tax liability
July 17th, 2012 | Uncategorized
Q. I plan on retiring next year at age 59½ as a FERS retiree. Can I withdraw all of my Thrift Savings Plan savings as a lump-sum payment? If so, what are my tax liabilities?
A. Yes, you may withdraw your TSP savings as a lump sum following separation from service. You will report the withdrawn amount as ordinary income on your tax return for the year. The amount of your tax liability will depend upon the details of tax return. Your withdrawal will be subject to 20 percent mandatory withholding against your tax liability. See https://www.tsp.gov/PDF/formspubs/tsp-536.pdf for more information.
Tags: FERS, income, lump-sum, taxes, TSP, withdrawal, withholding rate
Tax consequences of lump sum
June 19th, 2012 | Uncategorized
Q. My husband retired from 36 years of federal service on June 2. He is in CSRS. We hope he will begin receiving his check within a month or two. Given that he retired halfway through the year, and given that his initial checks will be only 60 percent to 70 percent of what is due, we anticipate that he could get the money owed for those first months in a lump sum in the next tax year. This could be a sizable sum and could have significant tax consequences. It also makes it hard to plan for the correct amount of withholding for this year. I was told that there is a rule that when he gets that lump sum, if it is over $5,000, he can put it in his Thrift Savings Plan account. Is that correct? If so, what paperwork do we need to file?
A. I know of no such rule. Annuity income is not eligible to be deferred into the TSP.
Tags: annuity, CSRS, deferred, income, lump-sum, retirement, taxes, TSP, withholding rate
TSP withdrawal
June 19th, 2012 | Uncategorized
Q. I plan to retire next month at age 62 and withdraw my entire Thrift Savings Plan account. I know that they will withhold 20 percent for federal taxes, but how can I keep from being taxed on that amount as income in the same calendar year? With my current rate of pay, adding some $300,000 to $400,000 in the TSP withdrawal will surely kill me in taxes.
A. Assuming that you are determined to withdraw your entire account balance at once (why would you do this?), you can roll over part of your withdrawal to an IRA.
Tags: IRA, rollover, taxes, TSP withdrawal, withholding rate
Loan and in-service TSP withdrawal
June 7th, 2012 | Uncategorized
Q. I will be 59½ in August. I would like to make an in-service withdrawal from my Thrift Savings Plan. At this time, I have a loan out on my account. Do I need to repay this loan before I take an in-service withdrawal for the total amount in my account, and how much tax will I be charged for this withdrawal?
A. You do not need to repay the loan before taking an age-based in-service withdrawal. The automatic tax withholding rate on these withdrawals is 20 percent unless you transfer your payment to another retirement plan or account.
Tags: in-service withdrawal, loan, retirement, tax, transfer, TSP, withdrawal, withholding rate
TSP and taxes
June 21st, 2011 | Uncategorized
Q: I was putting $10 per pay period into my TSP account. I increased it to $400 per pay period and my state and federal tax amount withheld went substantially lower. Is this correct and should I adjust my exemptions?
A: It is probably correct since deferring your pay into the TSP reduces your taxable income for the year of the contribution. You should consult your tax preparer about the appropriate withholding rate, but if your taxable income is lower, it makes sense that your withholding should be lower.
Tags: taxes, TSP, TSP deposit, withholding rate