Newbie tax question

[joshdacane]

My father, taking an interest in what the hell his son is doing with his money, asked me a question about how TSP works for tax purposes...and I couldn't necessarily answer him.

I know (believe) that the percentage taken out is taken before taxes and is taken tax-free, and that it is taxed like income upon receiving retirement payments. Early withdrawals are punished pretty substantially and may be taxable twice, essentially.

Are contributions considered tax-deductable like (I believe) contributions to 401Ks and other things are (within limits)? And is this why there is an IRS-imposed limit to how much can be contributed?

Thanks...I promise at some point, I will stop asking dumb questions.

 

[Spaf]

Josh,
I'm not an accountant!....But, we have several members that are CPA. GeorgiaGal is one. Why not send her a PM and a link to your inquiry! That way U will get some professional advice. This is Sunday, but she is a regular poster. She or other CPA's could help U a lot better!
Spaf

 

[joshdacane]

I'll give them a couple of days to see it on their own...I figure I'm not filing anytime soon so I have a bit of time.

Thank you for your advice though.

 

[Aviator_Guy]

My father, taking an interest in what the hell his son is doing with his money, asked me a question about how TSP works for tax purposes...and I couldn't necessarily answer him.

I know (believe) that the percentage taken out is taken before taxes and is taken tax-free, and that it is taxed like income upon receiving retirement payments. Early withdrawals are punished pretty substantially and may be taxable twice, essentially.

Are contributions considered tax-deductable like (I believe) contributions to 401Ks and other things are (within limits)? And is this why there is an IRS-imposed limit to how much can be contributed?

Thanks...I promise at some point, I will stop asking dumb questions.

Your TSP contributions and your TSP matching funds are totally tax free until you pull the money out when you retire. So, if you’re making 100K and you deposit 15K per year into your TSP account, the State and Federal W2’s show your income as only 85K. This is a huge savings to you. I’m in the 15% tax bracket, so 15% of 15K is about 2K per year in savings that would normally go to the tax man.

I live in California and they have a state income tax, so I also save on my state taxes since the TSP reduces my state income tax burden. So, I would recommend maxing out your TSP to help reduce your state and federal tax burden. So, before you earn any interest from the TSP, you save money every time you make a deposit. You can’t touch it when it’s working for you in the TSP, but it’s yours. If you’re a FERS employee, you will get matching funds and those are not seen as income which is another advantage.

If you decide to get out of federal service before you retire, you can roll it over into your new company 401K without any penalty. I think the IRS rule is if you’re under the age of 59 ½ years old, you will pay a prepayment penalty of 10 percent if you take it out prior to that age. In addition, I think you have to report the money withdrawn as income on the year you take it out.

For many years the maximum you could contribute was only 10 percent of your base pay. This rule has recently changed and it’s a huge improvement. You can now contribute 15K and 20.5K if your age 50 or above. I max mine out early in the pay fiscal year, but always careful not to lose my matching funds by contributing too much.

Our FERS / TSP system is an outstanding retirement system, but only if you take advantage of it. I started working as a fed worker in 1985, so I was lucky enough to catch it when it first started. Max it every year, especially when your young and you will be rewarded with a very nice retirement. Good luck with your TSP investments!

 

[Show-me]

Are contributions considered tax-deductable like (I believe) contributions to 401Ks and other things are (within limits)? And is this why there is an IRS-imposed limit to how much can be contributed?

Thanks...I promise at some point, I will stop asking dumb questions.

Ask all the questions you want.

Yes. You do not pay taxes on contribution until you withdraw them, just like a 401k.

IRS limits covers everyone across the board. My opinion is they wanted to limit how much income wealthy people could hide from taxes.

Hope this helps, but I would like to hear GG chime in. She is the expert.

 

[GGal]

What is there for me to add?

Contributions are "pre-tax."

The limits are not "IRS imposed," because IRS didn't pass the law, Congress did.

Since middle-income folks bear the brunt of the income taxes, I don't think the limits are necessarily aimed at "the wealthy."

I think the limits are aimed at all taxpayers, and the reason for the limits is because Congress has to try and control how much tax relief there is, because of the deficit, and to make sure enough tax is paid in.

But to know for certain, we would have to go back more than 20 years ago, and read the senate finance comittee floor reports.....which can be quite interesting at times (the floor reports).

 

[joshdacane]

Having never done my own taxes before (my rule - if you claim me as a dependent, you do my taxes) - I know that when I filled out my W-4, there were spaces to put in deductable IRA contributions, among other deductions. Should I assume that because the contributions are taken directly out of my check, pre-tax, that TSP contributions are not eligible for deductions of any sort?

 

[Show-me]

Never assume anything and good questions newbie.

I think I know were you are hung up at. It's not a "deduction". It is a "pre-tax" contribution. It is all tracked by your agency acconting dept. and it will be on your W-2 as to what your total contributions are and biased on that W-2 your gross will be adjusted for tax purposes.

OK I just dug up my W-2. Block 12a has your tsp contributions. Also block 37 lists you pre-tax health benefits and block 40 list FSA benefits which has tax benifits.

Like GG said, it is "pre-tax" item.

Hope this helps.

 

[qibovin]

my W-4--spaces to put in deductable IRA contributions, among other deductions. Should I assume...not eligible for deductions of any sort?

Never assume anything and good questions newbie.
It's not a "deduction". It is a "pre-tax" contribution.

your gross will be adjusted for tax purposes.

Wherever your IRS withholdings are actually calculated should be aware (from month to month if you change it) of your TSP withholdings and adjust accordingly. If not, if there is a place on the W-4 to report your gross income, you should list your income after TSP withholding.