How Are Taxes Calculated with an Early Withdrawal From a TSP?

by Mark Kennan, Demand Media
    You can use Form 1040 to report your TSP distributions.

    You can use Form 1040 to report your TSP distributions.

    Thrift savings plans (TSPs) function similarly to 401(k) or 403(b) plans when it comes to taking distributions and paying taxes on them. If you aren't taking a qualified distribution, you'll also have to pay an early-withdrawal penalty. For traditional TSPs, you have to be 59 1/2 years old to take a qualified distribution. For Roth TSPs, you have to be 59 1/2 or permanently disabled, and your account has to be at least five years old. You can avoid the penalty, however, in the case of an exception such as high medical expenses, permanent disability, or if the Internal Revenue Service levies your plan.

    Step 1

    Calculate the amount of money that comes out of your traditional TSP and your Roth TSP. The amounts are always taken proportionally based on the size of your account. For example, if you have $40,000 in your traditional TSP and $60,000 in your Roth TSP, 40 percent of your distribution is taken from your traditional TSP and 60 percent is taken from your Roth TSP. Therefore, if you take out $10,000, $4,000 comes from your traditional TSP and $6,000 comes from your Roth TSP.

    Step 2

    Calculate the taxable portion of your traditional TSP distribution. If you haven't made any contributions with tax-exempt payments, the entire distribution is taxable. If you've made contributions with tax-exempt money, the portion of your distribution that comes from those contributions is tax-free. Continuing the example, say 25 percent of your traditional TSP value is from tax-exempt earnings. Of the $4,000 distribution, $1,000 is tax-free and $3,000 is taxable.

    Step 3

    Calculate the taxable portion of your Roth TSP distribution. If you're taking a qualified distribution, the entire distribution is tax-free. However, if it's not, you have to split the distribution between your contributions, which come out tax-free, and your earnings, which are taxed. For this example, if your Roth TSP is 65-percent contributions and 35-percent earnings, $2,100 of the $6,000 distribution is taxable.

    Step 4

    Add the taxable portion of the traditional TSP distribution to the taxable portion of the Roth TSP distribution. In this example, add the $3,000 taxable portion of the traditional TSP to the $2,100 taxable portion of the Roth TSP to find a total of $5,100 is taxable.

    Step 5

    Multiply your taxable portion by the applicable federal, state and local tax rates to calculate the income taxes on the distribution because it is treated as ordinary income. For example, if your federal tax rate is 30 percent, multiply $5,100 by 0.30 to find you'll pay $1,530 in federal income taxes.

    Step 6

    Multiply the portion of your distribution that isn't exempt from the early withdrawal penalty by 10 percent to figure the additional tax penalty. If you're taking a qualified distribution, this penalty doesn't apply. In this example, if you don't qualify for any exceptions, multiply $5,100 by 10 percent to find you owe a $510 penalty, paid with your federal income taxes.

    About the Author

    Mark Kennan is a freelance writer specializing in finance-related articles. He has worked as a sports editor for "Ring-Tum Phi" and published articles on a number of online outlets. Kennan holds a Bachelor of Arts in history and politics from Washington and Lee University.

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