Retirement Planning Retirement PlanningRetirement Planning
Advice on how to prepare for life after government.

TSP and Taxes

Do you know the circumstances under which you can withdraw funds from your Thrift Savings Plan account without a tax penalty? Are your heirs aware of the tax implications of the choices they will have to make about the funds in your account after you're gone? These two issues come up frequently in my discussions with federal employees contemplating retirement, but they often are misunderstood.

Taxes and Penalties

In a publication on tax rules, the TSP notes the following:

If you receive a TSP distribution before you reach age 59 ½, in addition to the regular income tax, you may have to pay an early withdrawal penalty tax equal to 10 percent of any portion of the distribution not transferred or rolled over. The additional 10 percent tax generally does not apply to payments that are:
  • Paid after you separate from service during or after the year you reach age 55;
  • Made because you are totally and permanently disabled;
  • Paid as substantially equal payments over your life expectancy;
  • Annuity payments;
  • Ordered by a domestic relations court;
  • Made because of death; or
  • Made in a year you have deductible medical expenses that exceed 7.5 percent of your adjusted gross income.

Notice the first paragraph says you'll be penalized by 10 percent if you take a distribution before you're 59 ½, then the first bullet point says you won't be penalized if you separate from service during or after the year you turn 55. So which is it?

Think of it this way: There are two basic groups of people who leave the government. The first is those who go before they turn 55, through resignation, early retirement, or special provisions for law enforcement officers and firefighters. The second is those who exit government in the year they turn 55 or later through regular retirement.

People in the first group have to be careful about withdrawing funds from their TSP account until they are 59 ½. If they want to do so and avoid the tax penalty, they have two primary options:

  • Choose a life expectancy payout -- a series of monthly payments computed based on a life expectancy table. As long as they continue the payment stream for five years or until they're 59 ½ -- whichever is longer -- there is no penalty.
  • Purchase a life annuity. Unlike the life expectancy payout, which can be changed after 59 ½, the annuity option is for life. For people who take it, careful tax planning is in order.

The folks in the second group have more options. They can take a lump-sum distribution to pay off a mortgage or credit card debt. (Such a withdrawal would be subject to income taxes, but not the early withdrawal penalty of 10 percent). They also could choose a monthly payment of any amount. The life expectancy payout and annuity options are open to them, too. The only note of caution for this group concerns transfers from the TSP to an Individual Retirement Account. Remember, the 10 percent tax penalty still applies to withdrawals from an IRA prior to 59 ½.

Of course, you don't have to choose to withdraw your TSP funds as soon as you retire, unless you need the money. You can leave the funds invested and let them grow on a tax-deferred basis. If you're older than 70 ½ and have left federal service, you must either withdraw your entire TSP account or begin receiving monthly payments by April 1 of the following year. This also is the deadline for the TSP to start to send at least a "required minimum distribution" to you under Internal Revenue Service rules. For more information, see this TSP tax notice.

When You're Gone

If you Google the phrase "died penniless," you'll get almost 950,000 results. Famous people on the list include Oscar Wilde, Joe Louis and Judy Garland. While it's tempting to try to arrange things so you spend your last dollar the day before you die, it's almost impossible. Most of us will die with money in the bank, the TSP or other investment vehicles. But before your beneficiaries start thinking about what they're going to do with the money, they have to consider the dreaded taxes.

When the TSP is notified of your death, it will begin trying to locate your beneficiaries. It's a good idea for your designated beneficiaries to know who they are so they can claim their benefit in case the TSP has trouble locating them. Once the TSP has determined who the beneficiary or beneficiaries are, it will send forms explaining tax obligations in detail.

There is, naturally, a form to complete, called TSP-17, to claim the benefit of a deceased participant. A copy of the participant's certified death certificate must be sent in with the form. Payments usually are made 60 days after the TSP has received all the information it needs. That can be several months after the TSP is notified of the participant's death. If there is an outstanding loan or a court order against the account, it must first be resolved.

A beneficiary cannot leave the money in the participant's TSP account. A spouse can avoid the mandatory tax withholding on all or part of TSP payments by rolling over all or part of the death benefit payment directly to an IRA or eligible employer plan -- including the spouse's own TSP account, as long as the spouse is not receiving monthly payments from that account.

Payments made to beneficiaries other than the participant's spouse are subject to 10 percent federal income tax withholding. A beneficiary who is not a surviving spouse, however, can avoid this by requesting that the TSP transfer all or part of the death benefit payment directly to an "inherited" IRA, set up specifically for the purpose of accepting money inherited from a plan such as the TSP. The rules on such IRAs are complicated, so you probably should consult a tax adviser. Here is some important tax information from the TSP about death benefits payments.

Tammy Flanagan is the senior benefits director for the National Institute of Transition Planning Inc., which conducts federal retirement planning workshops and seminars. She has spent 25 years helping federal employees take charge of their retirement by understanding their benefits.


Tammy Flanagan has spent 30 years helping federal employees take charge of their retirement by understanding their benefits. She runs her own consulting business at and provides individual counseling as well as online training for the National Active and Retired Federal Employees Association, Plan Your Federal Retirement as well as the Federal Long Term Care insurance Program. She also serves as the senior benefits director for the National Institute of Transition Planning Inc., which conducts federal retirement planning workshops and seminars.

For more retirement planning help, tune in to "For Your Benefit," presented by the National Institute of Transition Planning Inc. live on Federal News Radio on Mondays at 10 a.m. ET on WFED AM 1500 in the Washington-metro area. Archived shows are available on

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