Thrift Savings Plan Withdrawal is treated as Annuity or Pension

[krickster]

My wife retired in 2020 and took money from her Thrift Savings Plan Account in 2021.    We scheduled monthly withdrawals of cash throughout part of 2021.     When I enter the information into TurboTax from the 1099-R, TurboTax is treating the funds as Pension Income, which is not correct.     

In Box 7 of the 1099-R, the IRA/SEP/Simple box is NOT checked, which I believe is correct.     

How do I get TurboTax to NOT treat this as pension income?  

Thank you!

[ThomasM125]

Form 1099-R reports distributions from a retirement account, so that is considered a pension distribution.  A Thrift Savings Plan is a tax deferred retirement plan, so it is technically a pension plan and is therefore referred to as such in TurboTax.

[dmertz]

The federal TSP follows the same rules as a 401(k).  The IRS requires that distributions from 401(k) plans be included on Form 1040 lines 5a and/or 5b with pensions and annuities.  Only distributions from IRAs go on lines 4a and/or 4b.  The TSP is not an IRA.

[krickster]

Next problem.     When I report an IRA, TurboTax NJ State asks me if I've already paid state income tax on some of the money.       It does not seem to give me the opportunity to do the same for the pension and annuity (TSP).  Am I missing something?     Thank you!

[ColeenD3]

If there was state withholding it would be on your 1099-R. Box 14 is State tax withheld.

[dmertz]

In NJ IRA contributions are not deductible on your NJ tax return, so your IRAs may contain basis in NJ nondeductible contributions which is what TurboTax is asking about with regard to IRA distributions.  The same is not true for contributions to the federal TSP, so distributions from the federal TSP and CSRS or FERS will be taxable the same as on your federal tax return.  TurboTax therefore has no need to ask the same question about your TSP, CSRS or FERS distributions that it does for IRA distributions.

[krickster]

The TSP is NOT tax deductible when you contribute the money (In New Jersey).    Federal deduction, but not state.     Income taxes have already been paid on the basis for the TSP contents with regard to New Jersey State taxes.     This is a fact.      How do I deal with it?

[dmertz]

@krickster , I now see that you are correct, that despite the TSP generally being subject to 401(k) rules and being reported on a W-2 with the same code as 401(k) contributions, TSP contributions made while a NJ resident are not excluded from NJ income the way as 401(k) contributions.

See the reply by AmyC in this thread:

https://ttlc.intuit.com/community/state-taxes/discussion/new-jersey-tax-on-tsp-401-k-withdrawal/00/1...

[DaveF1006]

Yes, there is a specific method for reporting this so that this doesn't get reported as taxable income in NJ. According to NJ state sources  you would use the Three-year Rule Method to exclude your pension so it is not reported as taxable income until the payments you receive from the plan equal the amount you contributed. Once you have received an amount equal to your contributions, all payments from the pension plan are fully taxable.

To exclude it, providing if you haven't exhausted your contributions, is that after you record your 1099R, there are a series of follow up questions in the federal interview.. One of these asks where this distribution is from, you will indicate that this is the General Rule or 401K benefits. Do not list an amount where it says NJ Distribution amount. Here is what the screen looks like.

@krickster 

[krickster]

Thank you very much.   Just one more question?    I am no tax expert, so I may be confused, but your reply says "According to NJ state sources  you would use the Three-year Rule Method to exclude your pension so it is not reported as taxable income until the payments you receive from the plan equal the amount you contributed. "

But then you say:  "you will indicate that this is the General Rule".      Is there a contradiction here?

Thank you!

[DaveF1006]

Thanks for pointing this out. I checked the wrong box to use as an example. You would check the three-year rule pension rather than the general rule.

@krickster

[krickster]

Thank you!    Next concern.    We will not be able to withdraw all of the previously NJ Taxed funds within 3 years.   Does that prevent us from doing so?

[DaveF1006]

If you are unable to withdraw all of your contributions within three years, then select the general rule. If you use the General Rule Method, part of your pension or annuity payment is taxable and part is excluded from your income every year. If you are filing a resident return, you must report both the taxable and excludable portions of your distribution on the separate lines provided for that purpose on Form NJ-1040.

Please read this NJ source for further details.

@krickster

[Trg16]

I have the same problem. I see what the expert said but I still don't understand how/why that is a pension.  I have looked at the IRS publications and I see nothing specific. Today I contacted TSP to inquire as to why it is treated as a pension. 

[dmertz]

On your tax return, any retirement plan that is not an IRA is deemed to be a pension plan.

The portion of the tax code that establishes the federal TSP specifies that the TSP generally follows the rules of section 401(k) of the tax code.  Section 401 of the tax code is titled Qualified pension, profit-sharing, and stock bonus plans, so the TSP is treated as a pension for tax purposes.