What Percentage of TSP is Taxed?

Shawn Plummer

CEO, The Annuity Expert

TSP Taxation: Understanding the Basics

The Thrift Savings Plan (TSP) is a retirement savings and investment plan for federal employees and members of the uniformed services. It’s crucial to understand the tax implications of your TSP contributions and withdrawals.

Taxation of TSP Contributions

  1. Traditional TSP: Contributions to a traditional TSP are made pre-tax, meaning they reduce your taxable income for the year they are made. However, when you withdraw funds during retirement, both your contributions and your earnings are taxed as ordinary income.
  2. Roth TSP: Contributions to a Roth TSP are made with after-tax dollars. This means you pay taxes on the money in the year it is contributed, but withdrawals in retirement, including earnings, are generally tax-free, provided certain conditions are met.

Taxation of TSP Withdrawals

  • 100% Taxable: When you withdraw from a traditional TSP in retirement, 100% of the withdrawal is subject to income tax. This includes both your original contributions and any investment earnings.
  • Minimum Distribution Requirements: Starting at age 73, you are required to take minimum distributions from a traditional TSP, which are also taxed as ordinary income.

Special Considerations

  • Early Withdrawal Penalties: Withdrawing from your TSP account before age 59½ can incur additional taxes and penalties, barring specific exceptions.
  • Rollovers: Rolling over a traditional TSP into a Roth IRA can trigger immediate tax liabilities but may offer tax-free growth and withdrawals later.
  • state Taxes: Depending on your state, TSP withdrawals may also be subject to state income taxes.

TSP Tax Table

Contribution TypeContributions Taxed?Withdrawals Taxed?
Traditional TSPNo (Pre-Tax)Yes (100%)
Roth TSPYes (After-Tax)No*

*Conditions apply for tax-free Roth TSP withdrawals.

Conclusion

In summary, for a traditional TSP, 100% of the withdrawals are taxed as ordinary income in retirement. Understanding these details helps in planning for retirement and managing tax liabilities effectively. For personalized advice, it’s recommended to consult a tax professional or financial advisor.

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Shawn Plummer

CEO, The Annuity Expert

Shawn Plummer is a licensed financial professional, insurance agent, and annuity broker with over 14 years of first-hand experience with annuities and insurance. Since beginning his journey in 2009, he has been pivotal in selling and educating about annuities and insurance products. Still, he has also played an instrumental role in training financial advisors for a prestigious Fortune Global 500 insurance company, Allianz. His insights and expertise have made him a sought-after voice in the industry, leading to features in renowned publications such as Time Magazine, Bloomberg, Entrepreneur, Yahoo! Finance, MSN, SmartAsset, The Simple Dollar, U.S. News and World Report, Women’s Health Magazine, and many more. Shawn’s driving ambition? To simplify retirement planning, he ensures his clients understand their choices and secure the best insurance coverage at unbeatable rates.

The Annuity Expert is an independent online insurance agency servicing consumers across the United States. The goal is to help you take the guesswork out of retirement planning and find the best insurance coverage at the cheapest rates

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