TSP loans and retirement

Q: I plan to retire from a federal law enforcement position at the end of February. I am covered under the Federal Employees Retirement System and will have an outstanding Thrift Savings Plan loan balance when I retire. I assume that there will be some type of “demand for payment” notice sent by TSP, and if I don’t repay the loan by a certain date, the balance will be considered a withdrawal. Will the TSP deduct the 10 percent penalty from my account, or will they bill me? Will the “withdrawal” be taxed along with my regular income on my 2011 tax return, or is it taxed at a higher rate? Will I have to make payment to the IRS prior to the filing of my 2011 tax return? Will an outstanding TSP loan delay in any way the processing of my retirement pay?
 
A: Your unpaid loan balance, including interest, will be declared a taxable distribution for tax year 2011 and taxed as ordinary income. There will be no withholding and you’ll settle up with the IRS, including any tax and penalty due, when you file your 2011 return. Before then, you are not required to make any tax payments, but you may want to make an estimated tax deposit to cover the liability and avoid under-withholding penalties. This is really an issue for a qualified tax preparer. If you are your tax preparer and are not sure what to do, then you should find someone to help you who knows.