Q: I had to retire from federal service because of medical reasons, and I was granted the medical retirement in 2009. I had to withdraw all my TSP funds in order to survive. I was 57 years old and I had 20 years of time, however, I did buy back three years so it should have been considered 23 years of federal service employment. Can someone tell me what to expect with my 2009 income taxes, such as penalties and taxes?
A: Your federal service record has no impact on the taxation or penalties imposed on TSP withdrawals. The money you have withdrawn from your TSP account will be taxed as ordinary income during the year in which it was withdrawn. If the money was withdrawn after you retired, and you retired during or after the calendar year in which you reached age 55, then there will be no penalty imposed for early withdrawal.