Any distribution from the TSP will be your taxable income and will be added to your other taxable income to calculate tax liability on the total amount.
Please try to avoid large distribution in the single year because that will push you into the higher tax bracket.
If you need some for living - these are your funds and you may take a distribution - but you might be in better position if you postpone part of the distribution till 2010 - so that part will be taxable in 2010 and not in 2009.
Withholding is not your tax liability - that is only withholding similar to withholding from your paycheck - you actual tax liability is determined at the time you file a tax return - and it may be more or less than 20%.
If you provide your other income - I will estimate your total tax liability.
Because you are below 59 1/2 - the distribution will be subject of 10% early distribution penalty.
In additional - your distribution will be taxable on the state level - tax liability will be calculated the same way - on the total income. California has its own 2.5% early distribution penalty.
There are some exemption from penalty - but they are very limited.
Let me know if you need any help.
I am not concerned with the 20% tax withholding. My issue is the 10% penalty. Does it make any difference that I am forced to withdraw the funds from TSP? Do you know the exceptions or can you direct me to where I may find the info?
Does it make any difference that I am forced to withdraw the funds from TSP?
No - you always has an option to roll over ti the IRA account.
You may go to any bank or financial company - and they will be happy to open IRA for you.
Do you know the exceptions or can you direct me to where I may find the info?
For distributions from IRA accounts - there are several exceptions to the age 59½ rule. Even if you receive a distribution before you are age 59½, you may not have to pay the 10% additional tax if you are in one of the following situations.
You have unreimbursed medical expenses that are more than 7.5% of your adjusted gross income.
The distributions are not more than the cost of your medical insurance.
You are disabled.
You are the beneficiary of a deceased IRA owner.
You are receiving distributions in the form of an annuity.
The distributions are not more than your qualified higher education expenses.
You use the distributions to buy, build, or rebuild a first home.
The distribution is due to an IRS levy of the qualified plan.
The distribution is a qualified reservist distribution.
Additional exceptions for qualified retirement plans. The tax does not apply to distributions that are:
From a qualified retirement plan (other than an IRA) after your separation from service in or after the year you reached age 55 (age 50 for qualified public safety employees),
From a qualified retirement plan (other than an IRA) to an alternate payee under a qualified domestic relations order,
From a qualified retirement plan to the extent you have deductible medical expenses (medical expenses that exceed 7.5% of your adjusted gross income), whether or not you itemize your deductions for the year,
From an employer plan under a written election that provides a specific schedule for distribution of your entire interest if, as of March 1, 1986, you had separated from service and had begun receiving payments under the election,
From an employee stock ownership plan for dividends on employer securities held by the plan,
From a qualified retirement plan due to an IRS levy of the plan, or
From elective deferral accounts under 401(k) or 403(b) plans or similar arrangements that are qualified reservist distributions.
If none of these exemptions could be used - you need to look for other deductions to reduce your total tax liability - but none will affect early distribution penalty.
See for reference following IRS publications:
2008 Publication 590 page 53
2008 Publication 575 page 30
Tax Preparer
Taxes, Immigration, Labor Relations