John Grobe, Federal Career Experts
When I sat down at my computer to write the first draft of this article it was April 15, 2020, the normal due date for 2019 federal income tax returns. Thanks to the coronavirus pandemic, the due date has been pushed back to July 15th, so many of us haven’t yet filed our 2019 returns.
The following eleven points don’t just apply to those of us who haven’t filed our returns, they apply to all of us.
1. With rare exceptions, all withdrawals from the traditional portion of the TSP are fully taxable.
2. Withdrawals from the Roth portion are free from federal income tax if they are considered qualified.
3. For a Roth withdrawal to be considered qualified, you must have had a Roth balance in your TSP for at least five years and you must be at least 59 ½ years old.
4. Taxable TSP withdrawals (non-qualified Roth withdrawals and withdrawals from the traditional TSP) are taxed as ordinary income.
5. Regardless of what your tax rate for ordinary income is, the TSP will withhold taxes at certain specified rates. You can find the default withholding rates in the TSP publication Tax Information: Payments From Your TSP Account https://www.tsp.gov/PDF/formspubs/tsp-536.pdf. The most recent update of this form is from September 2019.
6. In many cases (especially regarding installment payments) the TSP will not withhold enough to cover your tax liability.
7. You are allowed change the withholding rate (generally by increasing it) on your TSP withdrawal form.
8. If you separate from federal service in the year in which you reach 55 or later (50 for special category employees) you will not be subject to an early withdrawal penalty. There are several other exceptions to this penalty that can be found in the above cited publication.
9. Beginning in the year in which you reach the age of 72, you will have to begin taking required minimum distributions (RMDs) from the TSP. There are exceptions to this rule: A) for everyone for the year 2020 – no RMDs are required in 2020 due to a provision in the CARES Act; B) for those who are 72 or older and still working at their federal job – the TSP has a “still working” exception; and C) for those not yet 72 who turned 70 ½ in 2019 or earlier – who must continue to follow the old 70 ½ rule for RMDs (except, of course, for the 2020 RMD).
10. Unless you specify otherwise, TSP distributions must come proportionately from your traditional and Roth balances. This can create a “tax trap” for those whose Roth distributions would not be qualified.
11. Not all states tax retirement income, so do not assume that the above points will apply to state income taxes.
And here’s an unexpected tax benefit we have for our 2019 taxes thanks to the passage of the CARES Act. The date for making contributions to a 2019 Individual Retirement Arrangement (IRA) is also July 15th, so you still have time to make one if you haven’t already.
ask.FEDweek.com: Taxes on Benefits – Federal Retirement