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Robin D.
Robin D., Senior Tax Advisor 4
Category: Tax
Satisfied Customers: 7267
Experience:  15years with H & R Block. Divisional leader, Instructor
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Unfortunately, I had to take an early hardship withdrawal on

Resolved Question:

Unfortunately, I had to take an early hardship withdrawal on my TSP retirement fund. I know about the 10% penalty, but I was wondering exactly what I should expect when the terms "other fees and taxes may be applicable". I live in Virgina, and expect to get hit with state taxes. I also withdrew a high amount, most likely putting me in a higher tax bracket. I have set aside monies to pay for fees/taxes/penalties, but I want to know if I've saved enough to cover any debt owed. Any advise would be much appreciated.
Submitted: 10 months ago.
Category: Tax
Expert:  Robin D. replied 10 months ago.

Robin D. :

Hello and thanks for trusting me to help you today. I am a tax adviser with over 15 years of experience.
The federal tax, state tax, and the 10% penalty are the normal amounts you would expect for this transaction. I am not sure exactly where you read the "other fees and taxes may be applicable" , but after making a financial hardship withdrawal, you cannot contribute to your TSP account for 6 months. So that would be seen as a penalty too because you lessen the growth in the TSP.
Depending on the hardship reason you may be allowed to use Form 5329 and gain relief from the 10% penalty.

Robin D. :

Exceptions could applied for the following situations:



  • Distributions made to your beneficiary or estate on or after your death.

  • Distributions made because you are totally and permanently disabled.

  • Distributions made as part of a series of substantially equal periodic payments over your life expectancy or the life expectancies of you and your designated beneficiary. If these distributions are from a qualified plan other than an IRA, you must separate from service with this employer before the payments begin for this exception to apply.

  • Distributions 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.

  • Distributions made due to an IRS levy of the plan under section 6331.

  • Distributions that are qualified reservist distributions. Generally, these are distributions made to individuals that are called to active duty for at least 180 days after September 11, 2001.

Robin D. :

The total withdrawal amount (before any taxes withheld) will be added to your income but you will be allowed the taxes withheld as a credit.

Robin D. :

My goal is to give you excellent service but please reply below if you need more information prior to rating.

Customer:

If I'm allowed to provide additional information, I have an annual income of @136,000. I had to withdraw $200,000 as I was out of work for 6 months this year (with no pay) dealing with serious medical issues, which included surgery. The money was for paying off bills and keeping me afloat while I was out without pay. I'm curious to know if setting aside $30,000 is sufficient to pay any fees/taxes that will be associated with the early withdrawal. Many, many thanks for your advise! Susan

Robin D. :

Hi Susan

Robin D. :

One sec while I do some estimating

Robin D. :

Do you file joint or single?

Robin D. :

Do you have any dependents?

Robin D. :

Do you know the medical costs you paid?

Customer:

single

Customer:

Actually, I was lucky and my insurance paid most. Out of pocket was less than $1,000.

Robin D. :

The annual income ($136000) you stated, was that the amount you received in the year?

Customer:

No dependents

Customer:

The income is my yearly salary, but I won't get all of that since I was on leave without pay for several months

Robin D. :

Should I then cut that in half or what?

Robin D. :

I need to know what you actually earned

Customer:

Not by half, but probably 1/3

Robin D. :

Ok one sec then please.........

Customer:

I can check if you don't mind waiting a minute

Customer:

If it matters, I claim myself at the end of the year...not during...

Robin D. :

At that amount you would owe (estimated ) federal 78,000. Now I am guessing they withheld for you on the $200,000

Robin D. :

That amount would need to be subtracted from your federal estimated tax liability.

Robin D. :

Virginia tax rate I will need to look up

Customer:

No, they didn't withhold anything (at least not that I'm aware of)

Robin D. :

You requested $200,000 and received same?

Customer:

And seriously? I would owe $78,000? Why so high? I had anticipated the 10@ penalty but this seems high

Customer:

yes, requested and received same

Robin D. :

The additional $200,000 places you in a 33% tax rate

Robin D. :

Of course your withholding from work would assist you too.

Customer:

yeah, I figured I'd be pushed up in the tax bracket

Customer:

What do you mean by "withholding from work"? sorry, not much of a tax expert! LOL

Robin D. :

I can give you a link to an easy estimator and you can gather your true info and enter to see what you are really facing if you would like

Customer:

the link would be wonderful!

Robin D. :

Every time you get paid state and federal taxes are withheld

Robin D. :

along with SS and Medi

Robin D. :

The federal and state withholding are what protect you from tax owed when you file

Customer:

Well, I know I get hosed every year in taxes as I don't have all that much to deduct.

Robin D. :

that is unfortunate

Robin D. :

Here is the link

Customer:

they take out over $30,000 in taxes

Robin D. :

That will assist you then (the withholding)

Customer:

that's great. Hope it helps a lot! LOL

Robin D. :

I wish I could tell you would not owe

Customer:

I'll give the link a try. Any other thoughts on what I can do now that might get that amount lower?

Customer:

Buy something? Build something? Anything?

Customer:

that would be deductible

Robin D. :

If you do not itemize then your standard deduction is all you can look to to assist, your contributions befor ethe distribution will help but doing anything at this point is going to be very limited

Robin D. :

Even if you were to buy a home the interest woudl not be enough to assist as we are close to year end

Robin D. :

Count up all your charitable gifts

Customer:

I just finished re-financing my home

Customer:

And I do itemize

Robin D. :

Then you would look to all on the Schedule A

Customer:

With church and other donations, I usually average around $1200 in charitable donations

Robin D. :

Charitable gifts will increase that

Robin D. :

I was using standard deduction so when you estimate

Robin D. :

get your last year return

Robin D. :

use those numbers and add anything else you can find to increase

Customer:

and I ususally end up with around $5,000 coming back from the feds and about $500 from state

Robin D. :

Then you need to make sure you use your last year return when you estimate

Customer:

ok

Robin D. :

that tax liability will decrease a lot

Customer:

One last question

Robin D. :

Yes

Customer:

Knowing only what I've been able to share today, do you think I can possibly get that amount owed down to something reasonable?

Customer:

or manageble?

Robin D. :

Most certainly

Robin D. :

A certain yes

Robin D. :

As I said I used standard deduction but you have much more to reduce

Customer:

thank goodness! :0) I've got about $30,000 saved up to pay. Better start saving more!

Robin D. :

Best wishes to you and let me knwo if you need any help with the estimating

Robin D. :

after you get the info together

Customer:

thank you. Have a wonderful day!

Robin D. :

You are most welcome

Customer:

I will come back if I need any further help. Just rated you too!

Robin D. :

Thanks, XXXXX XXXXX forward to assisting you again

Robin D., Senior Tax Advisor 4
Category: Tax
Satisfied Customers: 7267
Experience: 15years with H & R Block. Divisional leader, Instructor
Robin D. and 5 other Tax Specialists are ready to help you

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