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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 10123
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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If I am a resident of Puerto Rico and have a TSP account

Customer Question

If I am a resident of Puerto Rico and have a TSP account (from a previous federal job) and decide to withdraw money early, who do I pay taxes on this amount to? I need clarification because Puerto Rican residents, in general, are not subject to federal taxes.
Submitted: 10 months ago.
Category: Tax
Expert:  Lane replied 10 months ago.

Hi,

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Hi - I hold a JD (Juris Doctorate, a doctoral degree in the law), concentration in Tax Law & Corporate law, an MBA (specialization in finance & tax), and BBA from Mercer University’s Stetson School of Business and Economics, as well as CFP® and CRPS designations. - I can help here

Expert:  Lane replied 10 months ago.

So sorry to be the messenger, but you are taxed on distributions from the TSP because there was no tax paid on the part of your wages that were contributed to the TSP.

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Said differently, because those dollars have never been taxed (nor has the growth ON them been taxed) they will finally be taxed as they come out of the plan.

Expert:  Lane replied 10 months ago.

The regulations that apply here are the Puerto Rico Internal Revenue Code of 2011, as amended (the PRIRC), that the Puerto Rico Department of the Treasury (Hacienda) issued on January 9, 2013, regarding the Puerto Rico income taxation of benefits and payments from qualified retirement plans covering Puerto Rico participants.

Expert:  Lane replied 10 months ago.

"Under those rules, if an employer makes contributions to a plan for the benefit of a Puerto Rico participant during a plan year at the end of which the plan is qualified in Puerto Rico, (TSP is qualified) the participant will not have to include those contributions and the investment earnings thereon (collectively the ‘‘benefits’’) in gross income until the year in which the benefits are actually distributed to the participant."

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(Tax Management Compensation Planning Journal 4 2013 Tax Management Inc., a subsidiary of The Bureau of National Affairs, Inc. ISSN 0747-8607)

Expert:  Lane replied 10 months ago.

Hope this has helped … let me know if you have questions

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If this HAS helped, (and you don’t have additional questions on this), I'd really appreciate your positive rating … (by using the stars or rating request on your screen) … … That’s the only way I'll be credited a portion of what you've paid JustAnswer.

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Thank you,

Lane

Customer: replied 10 months ago.
Hi, I'm still not clear about the response. I know that the amount is taxable. I just don't know if I have to pay taxes to IRS or the Department of Treasury of Puerto Rico. The TSP account includes money contributed while working for federal government in Puerto Rico and Washington, DC.
Expert:  Lane replied 10 months ago.

Ahhh thanks for the clarification

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Under both codes you will only pay to to the country, of residence.

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The TSP is what's referred to as a "Dual Qualified plan" and for ANY dual qualified (meaning qualified under both tax codes) plan, the tax is paid to the taxing authority where the person is resident

Expert:  Lane replied 10 months ago.

Plans sponsored by the U.S. government (such as the federal Thrift Savings Plan) are considered dual-qualified.

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Circular Letter #15-16 (December 28, 29015), reminds employers who maintain dual-qualified plans that they are still subject to the Puerto Rico tax reporting and withholding requirements with respect to distributions made to Puerto Rico residents — even if the plan is U.S. qualified and benefits are paid from a trust established and operated in the United States

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http://www.hacienda.gobierno.pr/sites/default/files/publicaciones/2015/12/cc_pc_15-16_-_limites_para_planes_de_retiro_2016.pdf

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