Q. I was terminated from my position with the Federal Bureau of Prisons (I later got my job back through arbitration), and I’ve withdrawn money from my TSP. I was forced to pay a 20 percent penalty and another 10 percent on top of that. I was told I may be able to get back the 20 percent because it was from a termination. Is this true? If so, how do I accomplish this?
A. The 20 percent taken was federal tax withholding, not a penalty. The 10 percent taken was an early withdrawal penalty. The penalty would not have been assessed by the TSP but rather as part of your tax liability for the year of the distribution. This means that both of these are taxes and are issues that you must take up with the IRS.
Assuming that it has been more than 60 days since the money was distributed to you from the TSP, I doubt there is anything you can do to reverse the withholding. I suspect that you may be able to appeal the early withdrawal penalty, however. This is really a tax account/tax law question, and you should consult a good CPA for specific advice about your options and course of action.
