The general rules regarding the federal income taxation of withdrawals from the Thrift Savings plan are: A) All withdrawals from your traditional TSP balance are fully taxable as ordinary income; B) All qualified withdrawals from your Roth TSP balance are free from federal income tax; and C) In any non-qualified withdrawals from your Roth TSP balance the portion of the withdrawal that is due to earnings will be taxable at your rate for ordinary income.
In most cases there are exceptions to rules, and this rule is no exception. There is a case where part of withdrawals from traditional TSP balances are not taxable for federal income tax purposes. This exception doesn’t apply to a lot of people, but it does bear mentioning.
Combat zone pay is exempt from federal income taxes. If you contributed to your traditional TSP balance from your tax exempt combat zone pay, once you begin withdrawals, the portion of each TSP withdrawal that is based on your contribution from your combat pay will be free from federal income tax when you make a withdrawal. That amount will be noted on the Form 1099 you receive from the TSP.
In addition, if you withdrew money early from your Thrift Savings Plan account, the 10% early withdrawal penalty would not apply to the portion of your distribution that represented the tax-exempt contributions.
If you chose a TSP annuity (not a very popular choice), the portion of your annuity that was based on your tax exempt contributions would be spread out over your life expectancy, so a portion of each payment you receive will be free from federal income tax.
If you use an accountant to prepare your federal income tax return, make sure the accountant is aware that part of your TSP contributions came from tax exempt combat zone pay. This information, and a lot more helpful information on how your TSP is taxed, can be found in the TSP publication Tax Information: Payments From Your TSP Account https://www.tsp.gov/PDF/formspubs/tsp-536.pdf. The publication is up to date, having been revised in September 2019 to include all of the changes due to the Thrift Savings Plan Modernization Act.
ask.FEDweek.com: Taxes on Benefits – Federal Retirement