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Understanding Tax Payments on Your TSP in 2025

If you are a federal employee or retiree with a Thrift Savings Plan (TSP), staying informed about the tax implications tied to your account is essential in 2025. TSP withdrawals, whether planned or unexpected, can affect your overall tax liability. As retirement approaches or begins, it’s important to prepare not just for financial sufficiency, but also for tax compliance. Whether you’re initiating Required Minimum Distributions (RMDs), filing with your Form 1099-R, or managing installment payments, this page provides an in-depth review of what you need to know now.

2025 Tax Reporting for TSP Withdrawals

Each year, TSP participants who take distributions, taxable loan balances, or meet certain withdrawal conditions receive IRS Form 1099-R. This form reports the total amount distributed and the taxable portion. For 2024 distributions, paper versions of the form are mailed in mid-January 2025, while the digital version becomes accessible in your secure online TSP account by mid-February 2025.

• Withdrawals made on or before December 27, 2024 (noon ET) are reported as income for 2024.
• Transactions that occur after noon ET on December 27, 2024 are classified as 2025 income, even though they may have been requested before year-end.

Be sure to retain these forms, review the income year classification carefully, and cross-verify the details when filing your taxes.

Tax Withholding Rules for TSP Distributions

Federal tax withholding applies automatically to all taxable TSP distributions unless you elect otherwise, within allowable limits. Understanding the different types of withdrawals will help you determine what withholding applies and how to adjust it to suit your broader financial plan.

Eligible Rollover Distributions

These distributions are typically lump-sum withdrawals not rolled directly into another qualified retirement plan or IRA:

• Automatically subject to 20% federal tax withholding.
• Additional taxes may apply based on your total annual income.
• You may be responsible for paying the balance of owed taxes when filing.

Non-Periodic Withdrawals

These include single, ad-hoc withdrawals or installment payments set to last fewer than 10 years:

• Default withholding is 10%, though you can choose a different percentage using IRS Form W-4R.
• You may opt out of withholding entirely if eligible, but this requires deliberate planning to avoid underpayment.

Periodic Payments

If you’re receiving regularly scheduled monthly, quarterly, or annual payments projected to last 10 or more years:

• Withholding is based on IRS income tax tables using Form W-4P.
• You may increase or decrease withholding based on your expected total income.

Roth TSP Withdrawals

Roth TSP funds, when withdrawn under qualified circumstances, are not subject to federal income tax:

• No tax is withheld, and no tax is owed, provided:
  • The withdrawal occurs after age 59½, and
  • At least 5 years have passed since your first Roth contribution.

Any non-qualified Roth withdrawal may trigger taxation of earnings and should be reviewed carefully before action.

Penalties on Early TSP Withdrawals

Taking money from your TSP account before reaching age 59½ can lead to a 10% early withdrawal penalty in addition to regular income tax. However, several exceptions exist under IRS guidelines that may allow you to access your funds without incurring penalties:

Exemption Criteria:

• You separate from federal service in or after the year you turn 55 (age 50 for certain public safety employees).
• You begin a series of substantially equal periodic payments.
• You are determined to be permanently and totally disabled.
• Distributions are used for qualifying higher education costs, unreimbursed medical expenses, or a first-time home purchase under certain limits.

Documentation for any exception must be provided on your tax return. If improperly handled, penalties may still apply despite your eligibility.

Required Minimum Distributions (RMDs) in 2025

If you’ve reached the required age to begin minimum distributions, you must comply to avoid penalties. In 2025, the rules are age-specific:

• Born 1951–1959: You must begin RMDs at age 73.
• Born 1960 or later: You begin RMDs at age 75.

TSP will calculate your RMD amount and notify you by early January 2025. You are responsible for ensuring that you withdraw the correct amount before December 31 each year.

Failure to take your full RMD results in significant penalties:

• 25% excise tax on the amount not taken.
• If corrected within two years, this may be reduced to 10%.

Ensure your birth date, retirement date, and separation details are correct in your TSP records to avoid calculation errors.

Contribution and Deferral Limits for 2025

The IRS sets annual contribution limits for retirement accounts, including the TSP. For 2025, the updated limits are:

• Elective Deferral: $23,500
• Catch-Up Contributions (50+): $7,500
• Super Catch-Up (Ages 60–63): $11,250 (SECURE 2.0 provision)

If you participate in other retirement plans (like a 401(k)), ensure that your combined elective deferrals do not exceed the annual limit.

Excess Deferral Corrections

If you exceed the allowable limits:

• Request a correction by March 15, 2026.
• Excess contributions not withdrawn by this date will be taxed twice—once when contributed and again when distributed.
• A 6% excise tax applies annually to uncorrected excesses.

Review your contributions regularly, especially during payroll changes, promotions, or if contributing to multiple plans.

Planning Estimated Tax Payments in Retirement

After retiring, you may receive income from several sources: TSP, FERS annuity, Social Security, private pensions, or investments. In many cases, automatic tax withholding is insufficient to cover your annual liability.

To avoid IRS penalties for underpayment:

• Calculate your total projected income and withholding.
• If needed, make quarterly estimated payments using Form 1040-ES:
  • April 15, 2025
  • June 15, 2025
  • September 15, 2025
  • January 15, 2026

You may adjust future TSP withholding or increase withholding from other retirement sources to reduce or eliminate the need for estimated payments.

How to Adjust Your Withholding

Using IRS-approved forms and TSP-specific documents, you can adjust your withholding at any time. Changes take effect shortly after processing.

• Use Form TSP-78 to adjust withholding for TSP installment payments.
• Submit Form W-4P to adjust FERS annuity or other pension withholding.
• Utilize the IRS Tax Withholding Estimator to calculate ideal rates and avoid surprises at tax time.

Review your elections annually or when you experience a major life or income change.

Impact of State Taxes on TSP Withdrawals

While federal taxes are consistent, state taxation varies widely. Some states:

• Fully tax retirement account withdrawals, including from TSP.
• Offer partial exclusions, such as age-based deductions or income caps.
• Provide full exemptions for retirement income.

If you change your state of residence, your tax situation could change. This is particularly relevant for retirees relocating to lower-tax states or those with favorable treatment of federal pensions and TSP income.

Check with your state tax agency to confirm how your TSP withdrawals will be treated in your current or future home state.

Preparing for Tax Filing Season

Managing your TSP taxes means staying organized throughout the year. These best practices will help you avoid mistakes and ensure you file an accurate return:

• Download your 1099-R early and check for accuracy.
• Maintain records of all contributions, rollovers, and withdrawals.
• Identify and track qualified vs. non-qualified Roth distributions.
• Keep documentation for any claimed penalty exemptions.
• Report RMDs clearly, and retain confirmation of amounts taken.

Bring all relevant documents to your tax preparer, and maintain a personal record for long-term reference.

Staying Ahead of TSP Tax Responsibilities

Understanding how taxes affect your TSP account helps you plan better and protect your retirement income. The 2025 landscape requires attention to withdrawal timing, distribution types, withholding elections, and IRS deadlines. Awareness of how tax regulations evolve—and how they interact with your retirement strategy—is the key to avoiding preventable costs.

Take action throughout the year, especially if your circumstances change due to retirement, marriage, relocation, or changes in health. Being proactive minimizes your risk of penalties and gives you more control over your post-service financial life.

Confidently Managing TSP Tax Obligations

As a TSP participant in 2025, you have several tools and resources available to help manage your tax obligations efficiently. Whether you’re navigating withholding elections, coordinating retirement income sources, or making estimated payments, taking a detailed and informed approach will serve you well.

If you need further guidance or want professional help tailoring your tax strategy, speak with a licensed agent listed on this website who can help you make informed, personalized decisions for your financial future.