Early withdrawal tax penalty

[weaton177]

Hello Tom,
I retired from federal service in Nov 2014 under the "discontinued service provision" I have several hundred thousands in TSP. I am 55 years old and wanted to take some of the money out to buy a small ranch. I have a couple of questions,

1. First of all, Will I be taxed a 10% early withdrawal penalty from the IRS (because I am taking money out prior to age 59 1/2) ?

2. I heard one way to avoid the 10% early withdrawal is to set up a 72t plan. The question I have is can I take a large portion maybe $100,000 to make a down payment on real estate and then use the rest for "equal payments" required under the 72t plan? I will have military retirements kicking in at age 60 and will hopefully have income from the farm as well so I am not that worried about depleting my entire tsp account.

I sure hope you can help.
God Bless,
weaton177

 

[evilanne]

I'm not Tom but I believe any lump sum payment you take would be subject to the penalty because you retired prior to age 55 & buying a property wouldn't qualify for any other exception. The lump sum would be taxed as ordinary income and most likely put you in a higher tax bracket in addition to the penalty. The life expectancy on single life would give you approximately 3.38% of your 31 Dec 2016 balance that you could withdraw, if applicable, which would be divided by the number of months remaining in 2017 if you go through TSP. You can use the calculator on TSP.gov to determine if you need joint life calculation.

"If you separatefrom service before the calendar year in which you reachage 55, it may be subject to an additional 10% tax on earlydistributions." see https://www.irs.gov/pub/irs-pdf/p721.pdf

 

[tsptalk]

Welcome weaton177! And thanks evilanne for answering his question!

 

[nasa1974]

weaton177,

Have you thought about talking to a trusted financial advisor near you? You may have better control over your money if you transfer it out of TSP into a different retirement fund. It would not eliminate penalties and taxes for early withdrawals (it cost nothing to transfer to a separate 401) but you would have more human contact about your retirement funds.

 

[offroad]

so am talking to a federal retirement counselor and explaining to him that after 55 I am not subject to the 10% penalty. Sure I understand that I am subject to an income tax as taxable income for anything taken out of TSP after 55, but not the 10% penalty.

He kept saying I was wrong, that TSP is just like a 401k, and that anything taken before age 59 and 1/2 will be subject to a 10% penalty.

Do I need to educate the planet that this is not true? Lol. Found the tax document from the IRS where it clearly says for TSP after age 55 am not subject to the 10% penalty. Now I have to go back to him and trust that he knows what he is doing for planning? Well I will, to a point. given this is some rare rule I suppose.

https://www.irs.gov/pub/irs-pdf/p721.pdf

look at page 14 down the bottom where it talks about TSP withdrawal. Are my eyes playing tricks?

 

[weatherweenie]

There's also the option of doing a 72(t) 72(t) Distribution Rules ? Oblivious Investor

so am talking to a federal retirement counselor and explaining to him that after 55 I am not subject to the 10% penalty. Sure I understand that I am subject to an income tax as taxable income for anything taken out of TSP after 55, but not the 10% penalty.

He kept saying I was wrong, that TSP is just like a 401k, and that anything taken before age 59 and 1/2 will be subject to a 10% penalty.

Do I need to educate the planet that this is not true? Lol. Found the tax document from the IRS where it clearly says for TSP after age 55 am not subject to the 10% penalty. Now I have to go back to him and trust that he knows what he is doing for planning? Well I will, to a point. given this is some rare rule I suppose.

https://www.irs.gov/pub/irs-pdf/p721.pdf

look at page 14 down the bottom where it talks about TSP withdrawal. Are my eyes playing tricks?

 

[evilanne]

offroad...you might want to find a counselor that is more knowledgable. Is the counselor that you are talking to trying to get you to rollover your TSP to an IRA?

https://www.irs.gov/retirement-plan.../retirement-topics-tax-on-early-distributions

401(k) rules are the same see last entry in table "Separation from Service" under Exception to 10% Additional Tax
1st Column is Qualified Plans (401(k), etc.) marked Yes
2nd Column is IRA, SEP, SIMPLE IRA* and SARSEP Plans marked NO

 

[RazorCat]

so am talking to a federal retirement counselor and explaining to him that after 55 I am not subject to the 10% penalty. Sure I understand that I am subject to an income tax as taxable income for anything taken out of TSP after 55, but not the 10% penalty.

He kept saying I was wrong, that TSP is just like a 401k, and that anything taken before age 59 and 1/2 will be subject to a 10% penalty.

Do I need to educate the planet that this is not true? Lol. Found the tax document from the IRS where it clearly says for TSP after age 55 am not subject to the 10% penalty. Now I have to go back to him and trust that he knows what he is doing for planning? Well I will, to a point. given this is some rare rule I suppose.

https://www.irs.gov/pub/irs-pdf/p721.pdf

look at page 14 down the bottom where it talks about TSP withdrawal. Are my eyes playing tricks?

If you retire within the year you turn 55, or later, the 10% penalty does not apply. The counselor is wrong.

 

[RazorCat]

Take this to your (confused) counselor offroad.
https://www.tsp.gov/PDF/formspubs/tsp-536.pdf
Specifically, page 7.

 

[alevin]

ok, I decided to contribute my 2 cents from the peanut gallery. Looking at the first pub text vs the second pub's text on the subject, I think the first pub's text is written much more clearly. As written, it reads different to me than the text in the second pub, which can be read 2 different ways, one of which matches the first pub text, the second way matches what razorcat says. Here, for purposes of direct comparison-you decide. My recommendation is that you verify with another counselor. they may or may not give you the same answer as the first, depending on how they read each of the pubs. I'd have them read both before giving you advice. reading comprehension is a tricky thing when things are written in ways that can be read more than one way.

From page 14 of the first pub, top of second column: "However, this additional tax doesn't apply in certain situations, including any of the following. You receive the distribution (AND separate from government service during or after the calendar year in which you reach age 55)." My emphases and grammar indicators added to both.

From page 7 of the second pub, "The additional 10% tax generally does not apply to payments that are paid (after you separate from service during or after the year you reach age 55.)"

 

[kb9nvh]

It's amazing anyone can retire from federal service with all the wrong information. They took on base Retirement counselers away years ago and so it's a crap shoot getting good information. To make it worse you mostly will get info that pertains to non federal employees. The very last guy doing my retirement finally pointed out about three major mistakes I was making. Life insurance, day of retirement (31st vs 1st), and getting a retirment estimate was literally imposible. It was a horrible experience.

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