Rollover Partial TSP to IRA - Does the rollover then lock in to age 59-1/2 rules

[RazorCat]

Here is a FEDSMITH article regarding early withdrawal penalties. Basically, if you retire within the year you turn 55 (or later) you aren't subject to the early withdrawal penalties on distributions from TSP. TSP is an employer sponsored plan which differs from an individual IRA account. Different rules apply.
I took a one-time distribution of $20,000.00 (20% tax), rolled over 50% of remaining TSP into a traditional IRA upon retirement (no taxes applied until I started withdrawing from the traditional), and left the remaining 50% in TSP. I started taking distributions from my TSP at 57. 20% taxes withheld, no early withdrawal penalty. Since my overall tax rate was somewhere in the neighborhood of 13-14% I got back quite a chunk at the end of the year.
However, the early withdrawal penalty did apply to distributions from the traditional IRA so I waited until I was 59-1/2, and then reduced my TSP distributions to the minimum amount ($250.00).
Your income is reduced once you retire, hence an overall lower tax burden. As evilanne stated, just be aware how the one time distribution will impact your total taxable income for year. But, since TSP taxes withdrawals at 20% it shouldn't be an issue at year's end.
Retirement income is fluid, You should reassess every year depending on the income you require to live, and ever changing life events, i.e., increased travel, home repairs/renovations, vehicle purchases, etc.
https://www.fedsmith.com/2015/05/25/strategies-for-avoiding-the-tsps-early-withdrawal-penalty/
Hope this helps.

 

[evilanne]

Currently they only have one partial withdrawal option, however this should be changing within the next year. With the current partial TSP Withdrawal, you can have part as a rollover to IRA, a withdrawal payment to you and another part for annuity or any single or combination you choose. The other option is to do a full withdrawal where you determine the monthly amount annually. You can do both, but only if you do partial withdrawal before full withdrawal.

If you decide to make a large withdrawal, you need to look at the tax impact based on your other income. You could end up owing more than 20% in income taxes especially if you were working for large part of year. It depends on what your marginal tax rate is each year. Best wishes in whatever you decide to do...it does get complicated

 

[djlc86]

I think you are right though that if you rollover to an IRA and then withdraw you are subject to the early withdrawal 10% penalty (there are exceptions if you're using the distribution for medical or health or college or first-time home buying)

 

[djlc86]

Hey DA44,

Check out the TSP site for more information: (Taxes: https://www.tsp.gov/PlanParticipation/LoansAndWithdrawals/withdrawals/taxesOnWithdrawal.html ) and Withdrawal Options: https://www.tsp.gov/PlanParticipation/LoansAndWithdrawals/withdrawals/withdrawingAccount.html

 

[DA44]

Let me preface this with saying I retired without doing my homework well. I totally misunderstood how TSP withdrawals worked.

The question:
For people under 59-1/2, does money from a separation partial withdrawal rolled over from TSP into an IRA then become subject to under age 59-1/2 withdrawal penalties from the IRA as distributions are made before age 59-1/2?

The scenario:
I want to take some cash out of TSP. I haven't decided how much yet, but I want to do it quickly and would rather err on taking out more than I need than less. I understand if I don't roll it directly into an IRA via ETF that TSP will withhold 20% for Federal taxes (ouch!). I'm looking for a way to avoid that tax withholdings until I actually use the money. The allowed TSP Partial Withdrawal is not subject to under age 59-1/2 penalties. I was thinking if I rolled my TSP withdrawal to an IRA savings account I could avoid the 20% withholding upfront, and then just take distributions from the IRA as needed. That way any excess withdrawal wouldn't be taxed or have withholdings up front.

The whole plan falls apart if early age based withdrawal penalties apply once it's put into the IRA.

My guess is that it probably is subject to age restrictions since it's no longer TSP money.

Thoughts?

Basic bio info: I've been a premium member here for at least 10 years, but not very active in the forums.
Age 56 now.
34 years postal + 5 military credit.
Retired early June, won't see a pension payment until mid- to late- August as I understand it.
Was forced to switch to FERS in 1987 because I hired USPS five lousy weeks after the retroactive 1984 FERS law was made effective. I'm still bitter about that...Collecting my 79% in one source rather than screwing around with TSP withdrawals and SS would have just been so much easier. LOL