TSP Tax Withholdings.

[Lawrencewendall]

Couldn't find a better place to put this.

Maybe someone here smarter than me can solve this.

Background. Thrift Saving Plan distributions for separated participants are taxed at %20 if the distributions are expected to last more than 10 years. Conversions (TSP calls these "transfers") are not taxed and taxes are the responsibility on the participant. <https://www.tsp.gov/publications/tspbk02.pdf>

In my circumstance I started distributions in 2020 and the %20 tax withholding would pretty much cover taxes owed on distributions and transfers (to a Roth) in the 12% tax bracket. I get my distributions on the 10th of the month. In January, they withheld the taxes but in February they did not (now forcing me to pay quarterly taxes)

1) Why the arbitrary 10 year timeframe?
2) How often is this calculated? Month by month or annually?

 

[texcurtis]

I have a monthly amount withdrawn & have 20% held for taxes. Don’t really have anything else to be worried about. I believe the rules changed recently & if you are eligible to withdraw then You can period.

 

[Philliefan33]

Can’t you contact the TSP people and tell them to withhold from your distributions?

I know TSP (used to) have a lot of odd rules but it would be real odd if you weren’t allowed to specify a withholding rate.

 

[zinger1457]

Are you having the TSP transfer your payments directly to your Roth? These are the TSP tax withholding options I see for TSP installment payments, looks to me like you can change the default withholding amount to any amount you want. I believe the 20% withholding requirement is done for payments expected to be for less than 10 years.

Tax Withholding - Installment Payments

Since you have chosen installment payments that will last 10 years or more or payments based on life expectancy, we will withhold taxes as if you are a married person with 3 dependents on any taxable amount not transferred to a traditional IRA, eligible employer plan, or Roth IRA. Note: Withholding does not apply to disbursements of tax-exempt contributions, Roth contributions, or Roth qualified earnings.

However, you have three other withholding options. You may choose to have no withholding, change your withholding marital status or allowances, or withhold an additional amount. You should consult with a tax professional before you decide to change the default withholding.

 

[donheff]

I get monthly TSP RMDs and they don't take any tax out. When I set the withdrawal up I assumed they would pull taxes but for some reason they didn't. I still don't do quarterlies, I just added more Fed and state withholding to my OPM pension to cover the TSP income. I do the same for DW's pension and SS, neither of which are withholding. The OPM servicesonline portal makes it easy to tweak withholding. I do a Turbotax "whatif" when I file my taxes and tweak the withholding to get as close as possible to the anticipated taxes.

When DW's RMDs start we will have to make sure withholding is done since the amounts will be larger than I want to absorb in my pension.

 

[Lawrencewendall]

I have a monthly amount withdrawn & have 20% held for taxes. Don’t really have anything else to be worried about. I believe the rules changed recently & if you are eligible to withdraw then You can period.

I think this is the answer. I jumped into TSP and taxes were set as "Default withholding of married person with 3 dependents." I haven't had 3 dependents for over 10 years. I changed it to married with 2 "allowances". I hope that is right.

From https://www.investopedia.com/terms/w/withholdingallowance.asp
"If you are married filing jointly with no children and claim the standard deduction, you can claim one for yourself, one for your spouse"