Costs Involved

• All withdrawals for amounts over $200 that include the participant receiving a check (this includes rollovers) from a TSP are subject to a minimum 20 percent withholding for federal taxes. Should you elect to do so, you can have more withheld. This option makes sense for those who expect to be in a higher tax bracket and want to minimize the impact at year's end. Withdrawals are not subject to state tax withholding.
  
  

Timing of Withdrawals

• If you are over the age of 59 1/2, withdrawals are subject to the 20 percent federal tax withholding only. In other words, there are no additional penalties for these withdrawals, whether you choose to roll over or use the funds. However, a 10 percent penalty, in addition to the 20 percent tax withholding, will be imposed when the withdrawal is made if you are under age 59 1/2. Unlike the tax withholding, this penalty cannot be refunded at year-end like excess taxes, regardless of your tax bracket.
  
  

Payment Options

• If you are retired and over 59 1/2, you have several withdrawal options, none of which is subject to penalties. You can request partial withdrawals, payments based on life expectancy or a lump sum. If you elect a full withdrawal and are age 59 1/2 or older, you may elect to spread your tax liability over a five-year period. If you reached age 50 before 1986, you are able to spread your tax liability over 10 years.
  
  

Alternatives to Avoid Penalties

• There are a couple of ways to access TPS funds prior to age 59 1/2 and avoid the 10 percent penalty. One of these involves borrowing against your qualified retirement plan. Loans are available, and while you will have to pay interest, this is not considered a distribution so it avoids penalties. Another means of avoiding additional fees is to directly transfer your TSP assets into an IRA. Because the funds were never sent to you, but rather were sent directly to the IRA custodian, there are no tax withholdings or penalties.