The TSP withdrawal options and how they are taxed

ladies and gentlemen federal employees welcome to this episode today we're talking about taxes and taking money out of the Thrift Savings Plan this is so critical to understand because most people are absolutely shocked when they ask to get money from the tsp to figure out exactly what happened so I want you to go into retirement with your eyes wide open so you know exactly what to expect and how to get the most out of your Thrift Savings Plan in the time that you're actually saving it for right you're saving your Thrift for retirement you want to make sure you get the most out of it once you get there so if you're new here welcome so good to have you my name is down Hogs my financial planner who serves federal employees just like you every single day so let's Dive Right In so I'm going to talk about today the handful of different tsp withdrawal options and the tax implications that come with each one of them because they can be different depending on what type of withdrawal you take so let's start with the simplest type of withdrawal option that you can have and that is just a single withdrawal now just to keep things very clean and easy for all of us I am assuming here that you're already retired okay I'm assuming you're retired as a federal employee and you now have access to your tsp okay that is my assumption in this example okay so let's get that away if you're taking money out while you're working it's more complicated that is a topic for another video but if you are retired if you take a single one-time withdrawal option okay a single withdrawal basically you reach out to the tsp and say hey send me a one-time payment of x amount okay if you do something like that you certainly can and you have the option to take that money from either your Roth tsp or your traditional tsp now not all of you are going to have Roth that's up to you to decide where you should be putting your money I've got lots of videos on that if you want more information on where you should be putting your money but if you have both you can choose um to have some of your money coming out of uh you know some of that withdrawal coming out of the rock or some traditional or all of either one you have options to decide which bucket it comes out of there now you can't decide which funds to take it out of right that's not one option you have but you can decide whether the the traditional tsp or the rothies but you can't make a decision there now when it comes to taxes well if you do take money from the Roth tsp and you follow all the rules associated with the raw TSB then you get the benefits meaning you don't pay any taxes and there's no tax withholdings when you take money out of the Roth tsp that's the benefit of the raw tsp however I know many of you and most of you probably have most of your money in the traditional tsp because first of all if you're retiring soon then the Roth PSP probably hasn't been around for most of your career it's a relatively new thing okay so what happens if you take money as a single withdrawal from the traditional tsp well you're gonna owe taxes on it okay now here's the deal the tsp has a default withholding so just like while you're working out of your paychecks the government withhold taxes okay they withhold taxes hey look you're going to owe tax on this we're going to take out money now so you don't have to pay it later and then when you file your file your taxes later at the end of the year April 15th whenever you end up doing it right then they add everything up so okay did you pay too much taxes if so we'll give you a refund if you didn't pay enough then you're gonna owe us money at that time it's the same exact principle in retirement Now the default that the TSB does is 20 withholding that is their default for most type of withdrawals okay most distribution options they're going to withhold 20 so for example if you tell the tsp hey please send me one hundred thousand dollars well how much are you going to actually get you're gonna get eighty thousand dollars because they sent 20 off to the IRS now the next question is okay am I actually gonna owe 20 000 on that amount the answer is no you probably won't oh exactly twenty thousand dollars it's gonna be a different number it could be a smaller number it could be a bigger number it just depends what tax bracket you're in okay the twenty percent is just their guess okay it's just their guess it would be higher it could be lower depending on where you're actually at now you can ask them to withhold more than twenty percent but you cannot ask them to withhold less that is the minimum is the 20 okay and so far again we are only talking about the single the one-time withdrawal distribution option there's other options we'll talk about those in just a second but so far we've just been talking about if you wanted a one-time payment from your Thrift Savings Plan in retirement okay so that's the first time now the other type that is relatively new where in the past there used to be not as many options but some new types that have come into play is what they call installment payments now installment payments are exactly what they sound like where you can set it up to get either a monthly quarterly or annual yearly payment where you say hey I want a thousand dollars a month CSP and they'll send you a thousand dollars a month okay now you can set it up you can you can basically start those stop those at any time there's lots of stability when it comes to getting those started and stopped started and it's stopping them later there's tons of options when it comes to that um and if you let's say are taking a monthly withdrawal let's say you're getting a thousand dollars a month if you wanted to take a one-time payment while you're getting that's okay too there's quite a bit of flexibility built in um when it comes to the distribution options now what happens with taxes when you're taking an installment payment okay well again most of the time the default withholding is 20 most of the time you're not going to be able to withhold less than that but there is one exception to this and the one exception is when they deem that your payment whatever interval you're taking it is expected to last 10 or more years okay so if you are taking out an amount where they figure hey look he'll probably be able to do this on to 10 years right you won't run out of money within 10 years or there is an option to take instead of giving the government a dollar amount of hey send me a thousand dollars a month they there's another option that is based on your life expectancy you could tell them hey please send me an amount that you think I can take every year for the rest of my life and they'll run run the math and give you the number that they think you can do now they're not taking responsibility if you happen to run out earlier if something changes with how you invest your money or otherwise but they they do the best they can if you pick that option or if you pick a dollar amount for these installment payments that they deem to be able to last beyond 10 years then you don't have to withhold the 20 it changes basically they withhold the amount as if you were married with three dependents is roughly what they do okay so long story short though long story short for many many of you for many many types of TSB withdrawals probably most tsp withdrawals they are going to basically take out 20 off the top as a as a withholding okay so that generally speaking is probably what you want to plan on but you want to make sure that for you you want to see okay where how much am I actually going to owe okay once you file your tax return for the year you may only be in let's say the 12 tax bracket or but you may be in the 24 tax bracket it just depends on where you're at so if you're actually the 24 tax bracket and the only without 20 well you're in trouble you're going to owe more once you out actually file your tax return and vice versa if you're only in the 12 and excuse me and they withheld 20 then they're going to pay you back they're going to give you a refund for that money so that is basically in a nutshell some of the main options now again up to this point I've talked about installment payments there's monthly quarterly or annual and there is also just one-time payments now the last option is a annuity okay this option I've got lots of videos on this go check it out if you want to learn more I'm not going to go into depth but long story short you probably shouldn't use this option it probably doesn't make sense for you um but if you did basically what an annuity is is instead of going and just telling the TSB how much you want or telling them to use your life expectancy you actually go out to an insurance company right now MetLife offers this directly through the Thrift Savings Plan where you take your money and you give it to the insurance company and they will guarantee you a monthly payment for the rest of your life but in return you lose control of your money you give it to them they guarantee a payment but that chunk of change you gave them is now their property and is not yours so long story short you probably shouldn't do it but if you want the full analysis go check out my other videos that goes into the reasons and long story short the tax implications really depend on what type of money you're giving them um what type of payments what it really depends on the details of that annuity contract that you set up with them so um there's not overall you know principles that I'm going to talk through because it really depends a lot based on what kind of annuity you get but launch report you probably shouldn't do that okay you probably should not get an annuity so overall those are the tsp withdrawal distribution options of getting money out and long story short most of the time you're gonna they're gonna withhold twenty percent again you can have them withhold more if you think your tax bracket is going to be higher but you can't do less okay so those are the core things to know now if something isn't quite making sense there's tons of links in the description below or even to submit questions to us where we cover these questions in future episodes we do tons of things to give you guys as federal employees information you guys need to be successful and have an incredible retirement that is the goal so I hope that's helpful have an incredible rest of your day I'll see you guys next time

Channel: Haws Federal Advisors

Views: 21,726

Keywords:

Id: aBnvW2Wa_fg

Length: 10min 25sec (625 seconds)

Published: Mon Apr 10 2023