Q. I am 41 and due to unemployment for two years following my active-duty retirement, I need to withdrawal all my Thrift Savings Plan funds. When the 20 percent is withheld from my payment, does that then get applied to my tax liability for this year? I understand that I owe 20 percent in taxes on the money, so is it set aside like federal taxes withheld in a regular paycheck? In addition, there will be a 10 percent penalty due to my age? Is the penalty automatically taken out if I elect for a total withdrawal, or must I set this aside when filing 2012 taxes?
A. The withholding from your withdrawal will not include an allowance for any early withdrawal penalty you may owe, and is just a deposit against your future tax liability. It does not reflect the actual amount you will owe, which will be determined when you file your tax return for the year.