Taxes and the TSP

• $18,000 to an ABLE account 

In many cases the limits increase from year to year, allowing for more tax savings.  For 2025, those contribution limits are: 

• $7,000 to a Roth IRA or traditional IRA ($8,000 if age 50 or older) 

• $23,500 to the TSP or a 401(k), 403(b), or 457 plan (plus an additional $7,500 in catch-up contributions for people aged 50 or older or an additional $11,250 for those 60, 61, 62, and 63 years old) 

• $4,300 to an HSA for individual health insurance coverage, or $8,550 for family coverage (plus $1,000 if age 55 or older) 

• $2,000 to a Coverdell educational savings account 

• $19,000 to an ABLE account 

For federal employees who have contributed to the TSP and another employer’s retirement savings plan, it is possible that you may contribute more than the IRS limit. In this case, you may need to request a refund of the excess amount. 

A refund request form is only available in January each year from the TSP and the form must be submitted no later than March 15. Other employer plans affected by the elective deferral limit may also accept requests for excess deferral refunds. Review information from all your plan providers before choosing a plan from which to request a refund.  

If you contribute more than the allowable limit to any of the plans listed above, you have until April 15 or the extension deadline, if you file for a tax extension, to withdraw your excess contributions. If you miss that deadline, the IRS imposes a penalty of 6% of the excess amount for each year that it remains in your account. 

The Federal Retirement Thrift Investment Board will report all TSP distributions and withdrawals to the IRS, to the appropriate state tax agencies if applicable, and to you on IRS Form 1099-R, Distributions from Pensions, Annuities, Retirement or Profit-sharing Plans, IRAs, Insurance Contracts, etc. Distributions from beneficiary participant accounts will be reported as death payments on IRS Form 1099-R. 

There are tax penalties both if you withdraw money from your TSP account too early and if you don’t begin to withdraw funds early enough. 

The early withdrawal tax penalty is 10%above the income tax due on the withdrawal and is generally assessed when people receive a taxable distribution prior to age 59 1/2. You may be exempt from the penalty if you separate from federal service in the year you turn 55 or later (or age 50 or if you have completed 25 years of covered service for retired public safety officers) if you make withdrawals directly from your TSP but not if you withdraw money that you have first transferred to an IRA.  

If you need to start receiving payments from your TSP account and you are not exempt from the tax penalty based on the above exception based on your age at separation, you may be able to avoid the penalty by taking installment payments. When you start installments, you choose to receive a fixed dollar amount (minimum $25) or to have the TSP calculate an amount based on life expectancy. Installments based on life expectancy are an exception to the early withdrawal penalty tax. Remember that at younger ages, you have a lot of life expectancy left, so the payments will be rather small. For example, according to the IRS life expectancy table, at age 45, the life expectancy factor is 41. If your TSP balance is $500,000, the life expectancy payout at age 45, would be computed as $500,000/41 or a payment of $12,195 for that year taken monthly, quarterly or once/year. Also, be aware that the penalty can be applied retroactively if you do any of the following within five years of beginning your installments or before you reach age 59½, whichever comes later:  

• stop your life-expectancy-based installments 

• switch them to installments of a fixed dollar amount  

• take a distribution from your TSP account in addition to your life-expectancy-based installments 

The TSP tax booklet mentioned below lists all of the exceptions to the early withdrawal tax penalty.     

If you are older at the time you separate from federal service, you must begin receiving “required minimum distributions” (RMDs) at age 73 or, if you were born in 1960 or later, the age increases to 75. The TSP will calculate the amount you’re required to receive using your age, your traditional balance at the end of the previous year, and the IRS Uniform Lifetime Table, which can be found in TSP Publication 26 listed below. Your RMD calculation will include only your traditional balance, and only distributions from your traditional balance will count toward satisfying the RMD amount. Distributions of Roth money won’t count toward satisfying your RMD because Roth money in your account isn’t subject to RMDs. 

Be sure that your TSP account record has your date of birth and separation from service recorded correctly. Also remember that if your agency is late in reporting your separation, you may not receive a payment that satisfies the RMD by your required beginning date. If this happens, you may be subject to an excise tax of 25% on the amount that was not paid to you on time. (The excise tax is reduced to 10% if you meet the conditions of section 4974(e) of the Internal Revenue Code.) The first year in which you are separated from service and have reached your applicable age or older is called your first distribution calendar year. If you do not receive enough money from the traditional balance in your TSP account to meet your RMD amount during your first distribution calendar year, the TSP is required to disburse your first RMD to you by April 1 of the following year. That date is called your required beginning date.  

Remember: Be sure to keep your address current with the TSP if you move after retirement or after you leave federal service. If you are separated from federal employment, you can change your address online at the TSP website. You can also call TSP’s ThriftLine at 877-968-3778. 

Another way to estimate the RMD is by using the TSP Retirement Income Calculator. The RMD amount can be found under the results tab for “TSP Monthly Payments” under the “Life Expectancy” column. 

Here are some tools that will help you avoid paying a tax penalty: 

• TSP Booklet 26:  Tax Rules About TSP Payments  

• IRS Form 5329:  Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts

• What is Form 5329: Additional Taxes on Qualified Retirement Plans? 

Remember: Because tax rules are complex, it is recommended that you speak with a tax advisor or the Internal Revenue Service.