I HAVE A QUESTION ABOUT MY THRIFT PLAN SAVINGS PAYOUT AFTER RETIREMENT

[JayMcDonough]

I LIVE IN PA, AND PA IS AN EARNED INCOME STATE. I HAD A WITHDRAWAL 0F 153766 DOLLARS FROM MY TSP AFTER I RETIRED, AND TURBO TAX IS TELLING ME I OWE A STATE TAX OF 4804 DOLLARS. THE TAX WAS PAID ON THIS MONEY WHEN IT WAS EARNED. WHY AM I BEING DOUBLED TAXED ?

[re2boys]

What is the code in box 7 of your 1099R?  Is this a Roth TSP?

[JayMcDonough]

Box 7 has a number 2 in it. No it's not a Roth tsp.

[re2boys · Accepted solution]

Just a clarification, TSP contributions are before tax.  Federal taxes have never been paid on the contributions.

If box 7 is coded 2, it is an early distribution, exceptions to the early distribution penalty apply.  So, for federal, the distribution is taxable but you are not subject to the 10% early withdrawal penalty.

However, PA does not follow federal rules.  PA taxes have been paid on your contributions into the TSP.  For early distributions, the distribution is taxable to the extent that the distribution exceeds your basis in the plan.  Essentially, if you contributed $100K into the TSP over your career (not counting agency match) and you withdraw $150K, the first $100K you withdraw is a return of your already taxed contributions.  The remaining $50K is fully taxable on a PA income tax return.  The program should query you for your basis in the plan.

If you had waited until 59.5, the box 7 would be coded 7, which is fully exempt from PA income tax.

I've attached an excerpt from PA PIT Guide Chapter 7 that covers taxability of retirement plan distributions.  Finding your basis in the TSP will be the challenge.  You may need to contact the TSP.

[JayMcDonough]

Thank you for your answer. You mention in an example of contributing 100K and an agency match of 50K.  as I understand you answer, the 100K would not be subject to PA State tax because it was taxed when it was earned. Only the 50K of matching funds would be taxed because that was not state taxed yet. Is that correct ? In my case, I retired from the CSRS system and are exempt from any penalties by the passage of H.R. 2146 for "Public Safety Positions". The entire amount of withdrawal was my contribution dollars only, and PA State tax was taken out on all of that money at the time it was earned. My Agency made NO TSP contributions to my account. So, as I understand by your example, and the PA tax code on this, because the money was all my already taxed at the time it was earned, that the total withdrawal is not subject to PA State tax. Is that correct ?

[re2boys]

The 50K could be agency funds or growth in the investments, both are taxable in this situation.  Unless your investments lost money (?) a portion is investment gains that are taxable.  You can't assume that the entire amount was only  your contributions, there likely is investment gains included in the total.  You should have seen gains (and a few losses) in your investment on each quarterly statement that you received.    BTW, CSRS retiree here with a TSP.  I haven't contributed in 15 years but my TSP has steadily grown in value.

[EDKEI]

CAREFUL on this.  Years ago, back in 2019, I had taken money from TSP (traditional not ROTH), box 7 Distribution code 2 (early distribution exemption applies)  under age 59 1/2, BUT separated from USPS with age and service requirements 55 years old with 30 years of service (including military).   Called PA dept of Revenue, who's representative on phone initially and incorrectly stated the distribution was taxable.  I argued the point, she checked with supervisors...   AND IT IS NOT TAXABLE.   It is a PA eligible plan, and though I was only AGE 56 at time of disbursement,  I had satisfied the age and service requirements of the plan.   Once again this under certain conditions it is not taxable for PA.   

• If any Form 1099-R with distribution Code 2 in
Box 7 is submitted with the return, determine if
the distribution is from an eligible employersponsored retirement or pension plan for PA tax
purposes. Eligible plans must:
° Be in writing;
° Include provisions for separation of service,
old age or infirmity, and long-continued
service;
° Provide for payments at regularly recurring
intervals after separation form service until
death or an option for a lump sum payment;
and
° Do not permit the distribution of program
benefits to any employee until termination of
employment except for incidental disability
benefits or the return of the employee’s previously taxed contributions and income or
gains if the employee is required to contribute to the pension plan.
If these conditions are met, the distribution is
not taxable for PA personal income tax purposes.