How Is My TSP Taxed After Withdrawal From My Retirement?

Your age at retirement affects the taxes on your TSP withdrawals.
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Though retirement may be years away, planning for it when you're in your 20s and 30s can lower the amount you have to save. Using your thrift savings plan allows the money to grow tax-free while it stays in the account. To really plan for your retirement, you need to take into account how the distributions are going to be taxed at retirement.

Qualified Distributions

The taxes you'll pay on your distributions from your TSP don't change just because you're "retired." Instead, you've got to wait until you're 59 1/2 years old to take qualified distributions from a traditional TSP. Qualified distributions from a Roth TSP require you to be either 59 1/2 or permanently disabled. In addition, at least five years must have elapsed since January 1 of the first year you contributed. Generally, the taxable portion of non-qualified distributions incur a 10 percent additional tax penalty. However, if you choose annuity payments, your withdrawals aren't subject to the 10 percent early withdrawal penalty.

Early Retirement Exception

If you take money out before turning 59 1/2, you'll usually have to pay a 10 percent early withdrawal penalty. However, if you decide you want to retire after turning 55, you can start taking distributions without paying the early withdrawal penalty. For example, if you decide you'd like to retire at 56, you can start taking distributions penalty-free right away.

Traditional TSP Distributions

If you take a qualified distribution from your traditional TSP when you're retired, you're usually going have to count it as taxable income. Uncle Sam didn't tax you on the money when you made the contributions, so you've got to pay up when you take the money out. However, if you're putting in tax-exempt income, such as combat zone pay, you won't have to pay taxes on that portion of your withdrawal. For example, if your traditional TSP distribution contains $1,000 of tax-exempt income contributions and $5,000 of other contributions and earnings, you have $5,000 of taxable income.

Qualified Roth TSP Distributions

You don't have to share a qualified distribution from your Roth TSP when you're retired. You didn't get a tax break for contributing, so the IRS doesn't tax you when you take the distribution. If you anticipate paying more in taxes at retirement than when you put the money in the TSP, the tax-free withdrawals of a Roth TSP usually save you more than the tax break for traditional TSP contributions.

Non-Qualified Roth TSP Distributions

If you aren't able to take a qualified distribution when you're retired, the earnings portion of the distribution is taxed and subject to the 10 percent early withdrawal penalty. For example, if you take a qualified $7,000 Roth TSP distribution, you don’t have to pay any taxes. If the distribution isn’t qualified and $3,000 of the distribution represents earnings, you have to pay income taxes and the 10 percent penalty on the $3,000 of earnings, but not the $4,000 of distributions.

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