Q. I took out my Thrift Savings Plan lump sum, mainly to pay off my house. My lump sum was approximately $340,000, with about $68,000 in taxes taken out. Is the lump sum considered ordinary income? If so, this puts me in a high tax bracket for this year and has me owing about $40,000 to the government in taxes. Is this right? If so, this isn’t something they warn you about when you take it out.
A. Yes, a TSP distribution is taxed as ordinary income and you’ve provided an excellent example of why you should not make such a large financial decision without understanding the rules of the game you’re playing and carefully working through the implications. For what it’s worth to others, this is a terrible idea, particularly with today’s historically low interest rates.
