Olyphant, PA 路 Member since 2015 路 6 posts 路 4 votes
Good morning everyone, this is my first Bigger Pockets post and I'll make it short and sweet.
I was a Federal Employee for 7 years. I was in the Thirft Savings Plan (TSP) which is equivalent to a 401K. I have approximately 29k in my account. If I were to do a full withdrawal, I would have 20% in federal tax withholding and 10% penalty.
My question is, if I use this money to invest in my first property (a house-hack) could I write off the penalty and maybe even some of the federal withholding?
As a general rule, the 20% withholding is treated the same as the income tax withholding you have on your paycheck. At tax time, show the 20% as additional taxes withheld. Show the full amount withdrawn from your TSP as additional income on your 1040.
Although the amount withdrawn is taxable as ordinary income, you may be able to avoid the 10% early withdrawal penalty if the entirety of the funds were used for a qualified purpose which would include a qualified home purchase.
CPA 路 Belleville, IL 路 Member since 2014 路 255 posts 路 269 votes
9y
@Ken Byers - You will definitely want to talk to your CPA or reach out to one on the forums. There are a few strategies that might work for you to avoid the 10% penalty depending on if this is your first home purchase or if you are still involved with the TSP in a capacity that allows you to take a loan.
Olyphant, PA 路 Member since 2015 路 6 posts 路 4 votes
9y
Jake Hotternott, because I am no longer a Federal Employee, a loan is not an option. My CPA is not a real estate CPA so I will reach out to one on the forums. Thank you for your response 馃憤
Rental Property Investor 路 Mercer Island, WA 路 Member since 2008 路 22k+ posts 路 14k+ votes
9y
Keep in mind that the amount you withdraw is taxed as income. 20% may be withheld, but the actual tax may be more or less than 20%, depending on your situation. This amount is going to come on top of your other income for the year. If you're in the 15% bracket after other income, your tax will be only 15% of the amount you take out. OTOH, if you're in the 28% bracket, the actual tax will be 28% of the amount.