Taxes on early withdrawal from a ROTH TSP

5 Replies

Hello Bigger Pockets! I am seeking some advice on withdrawing from my Roth TSP. I finished my active duty last August and have not done anything with my TSP since then. It has continued to grow, but I am interested in pulling all of the funds out to use for investing in deals for myself. I know there are some incentives to using a self-directed IRA, but I am not interested. I am more interested in liquidating this asset.

What I know currently is since it is all roth contributions and earnings and the account is over 5 years old that it should not accrue the early withdrawal penalty of 10% from their website and video posted on their website. It would also appear, that I would not be paying any income tax on the roth contributions since I already paid those taxes, but I would be liable for taxes on any roth earnings that I would take out at my federal/state income tax rates since I am withdrawing early ( I am 32 years old). 

Does any have any experience on dealing with TSPs and what kind of tax implications I am subject to?  I believe I read through all of the material available on their website but I'd rather consult an actual tax pro that may have experience.  

Thank you for your time guys.

Greg

@Gregory A.

A 10% early withdrawal penalty will apply to the portion of withdrawalsfrom your Roth TSP that are attributable to earnings if you separate from your federal job before the year in which you turn 55.

Contributions should be penalty and tax free. I believe earnings will be penalized 10% and then taxed.  To be sure verify with your accountant. You may have some deductions that could mitigate the taxes if you are buying income producing property. Hardship withdrawals may also be considered. Also talk to your accountant about 72t distributions. I don’t know how much money you have or what tax bracket your in so it is hard to provide better details. 

@Carl Fischer

Thank you for the reply and the information. I don't have an accountant but perhaps it is about time to get one or at least a tax professional. The money I am looking to pull out of the account is just $30,000 with about $23,000 in contributions and $7,000 in earnings. As far as my tax bracket, I will probably gross around $80,000-$85,000 this year, but I do have a company 401k(traditional) with match that I contribute to, only 5% for the match and then an extra $5,000 flat for dependent care and another $1,000 towards an HSA. I was also a full time student for the spring semester in addition to my job so that may assist in additional deductions but those expenses were fully covered by my post 911 GI bill.

Do you happen to know if I can further deduct the rest of my dependent care? Daycare for the year is close to $12,000 which is greater than the $5,000 maximum contribution I can allocate to the FSA for dependent care. I may need to make another post about this as it is a separate issue, or just actually get a CPA on my team to give me detailed answers.

Thank you for your time again Carl.

@Gregory A.

Yout welcome and thank you for your service. It sounds like you may be in a low  tax bracket. I think The $7k in earnings would be around $2k in taxes netting you $5k.  If that isn’t worth it to you leave the $7k in the account and just take the $23k. Verify with a cpa they can be a wealth of information- mine are very helpful and worth what I pay and better than I am at knowing how to use the rules to my advantage. 

@Gregory A.  There are a number of great CPAs here on BP with extensive real estate knowledge. Speak with a few and see who's the best fit for you and your situation.

Happy to answer any questions you may have.

Good luck!

@Gregory A.

The following IRS publication is a good source for the ROTH TSP distribution rules.

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

However, I would first transfer the ROTH TSP to a ROTH IRA since ROTH IRA distributions are not subject to the mandatory 20% withholding at time of the distribution. Yes the tax will eventually need to be paid but at least you can delay it until you file your Form 1040 in April.