Money that is in your Thrift Savings Plan (with the exception of qualified earnings in the Roth portion of your TSP) either has been taxed (Roth TSP contributions) or will be taxed (Traditional TSP contributions and earnings).  This article will address the taxation of the Traditional portion of your TSP, while a future article will address the taxation of the Roth portion of your TSP.

Withdrawals from your Traditional TSP are fully taxable as ordinary income when they are withdrawn; they do not receive any favorable tax treatment like a long term capital gain or a qualified dividend.  Where they differ is in how much is withheld from your TSP payments for federal income tax; the amount of withholding on TSP withdrawals varies depending on the type of withdrawal you make.  A tax notice (Tax Information: Payments From Your TSP Account) is updated at least annually and included in the publications section of the TSP website.  The tax notice has a detailed table on page 3 that describes how each type of withdrawal is treated and what the default withholding rate is.


Two of the most popular withdrawal methods can leave you holding the bag at tax time due to under-withholding.

If you elect a single withdrawal, the default withholding rate is 20%; depending on your tax bracket, this might not be enough to cover the taxes that you will owe.  At the time of your withdrawal, estimate into which marginal tax bracket the bulk of the withdrawn money will fall and request additional withholding if needed.

If you elect substantially equal monthly payments according to the IRS life expectancy table, or of a fixed dollar amount that will last longer than ten years, federal income taxes will be withheld as if you were married and claiming three dependents.  Really?  I suspect that very few retired feds claim so many dependents.  I asked a colleague who is a CPA to calculate when the TSP would actually begin to take money out of monthly payments under this scenario; he calculated it to be at around $1,700 per month.  If you are taking monthly payments and do not request to have more taxes withheld from your distributions, you are asking to be hit by a big tax bill and by the estimated tax penalty.

There is a place on your TSP withdrawal form where you can request additional withholding.

The estimated tax penalty (ETP) is a penalty that most people who work for others do not encounter because they usually have enough taxes withheld from their paycheck to cover their taxes.  However, there is a legal requirement that 90% of our tax liability must be paid by the end of the tax year.  If you fail to have enough withheld, you will owe a penalty equal to 10% of the difference between what was withheld and 90% of your tax liability.  It is desirable to avoid tax penalties.

There are two age-based penalties that may apply to your Traditional TSP; one is for taking money out too soon, and the other is for waiting too long before taking your money out.

A 10% early withdrawal penalty will apply to withdrawals from your Traditional TSP if you separate from your federal job before the year in which you turn 55.  If you were to separate before your 55th year of birth, you could avoid the penalty if:


  • You elect monthly payments based on the IRS life expectancy table and continue those payments for five years, or until you turn age 59 ½ whichever is longer; or
  • You purchase a TSP annuity.

There is also an exception for special category employees (Law Enforcement Officers, Firefighters, Customs and Border Protection Officers, Air Traffic Controllers, Supreme Court and Capitol police officers, nuclear materials couriers and DSS Special Agents in the State Department).  They are exempt from the early withdrawal penalty if they separate from service in the year in which they turn 50, or later.  If they retire prior to the year in which they turn the age of 50, they can avoid the penalty as discussed in the previous two bullets.

In addition, there is no early withdrawal penalty, regardless of your age if your TSP distributions are:

  • Made because you are totally and permanently disabled;
  • Ordered by a domestic relations court;
  • Made because of the death of the account holder (beneficiary participant accounts only); or
  • Made during a year in which you have deductible medical expenses exceeding 7.5% of your adjusted gross income.

Like most other defined contribution plans the TSP has a 50% penalty for failing to take required minimum distributions (RMDs) beginning at the age of 70 ½.  However, the TSP has provisions in place that shield almost all participants from the penalty.  The penalty for failing to take a RMD is 50% of the amount of money you should have taken out, but didn’t.

For example, if your RMD was $5,000 and you withdrew $3,000 from the TSP that year, your penalty would be $1,000 (1/2 of the $2,000 difference).  Here is some information on how the penalty is dealt with in the TSP.

  • If you are still working at your federal job at 70 ½, you are not required to take a minimum distribution.
  • If you are taking substantially equal monthly payments of a fixed dollar amount at 70 ½ and fail to take out enough to meet the minimum required distribution, the TSP will send you an additional payment of the required amount before the end of the year.  If you elected the withdrawal option Substantially Equal Monthly Payments Based on the IRS Life Expectancy Table, once you reach the age of 70 ½, your withdrawals automatically follow the RMD schedule.
  • If you are not working and haven’t begun withdrawals by 70 ½:

The TSP will notify you at the beginning of the year after the year in which you turned 70 1/2 that you must begin taking out your money by April 1;


  • If you do not begin withdrawing the money by April 1, the TSP will transfer all your money into the G fund and you are penalized;
  • If you do not begin withdrawing your money within another nine months, you forfeit your account.  Don’t panic!  Once you begin taking your withdrawals and have paid your penalties, the TSP “un-forfeits” your account.

The TSP does not withhold state and/or local income taxes.