Hello:
If I were to withdraw $150,000 from my federal Thrift Savings Plan (401K) to use as a divorce settlement, what would I owe in taxes? It would not be an early withdrawal. My annual income is based solely on Social Security retirement funds and federal government pension and is approximately $41,840 per annum with deductions for federal taxes at $38.76, health insurance at $356.59 and life insurance at $23.08. Further, would the $150,000 given to my wife as a settlement be considered a tax deduction in that same year? What would be her tax liability on the $150,000 be? Her income is based solely on Social Security Disability and is $17,148 per annum.
Thank you in advance for considering and answering this question.
MartyMagee

AtlantaTaxExpert

MartyMagee:

Your age would help in my answer, because any money withdrawn by TSP owners who are 59.5 years of age and older are NOT subject to the 10% Early Withdrawal Penalty. Given the fact that you are drawing a federal pension and drawing Social Security tends to make me thing you are older than 60, but I do not know for sure.

The $150K settlement is NOT a deduction unless it is considered to be alimony, which is NOT likely. Talk with your divorce about this. If he/she does not know, tell him to find out from a competent tax professional. If it IS alimony, then it is tax deductible for you and considered to be taxable income for her. However, IMHO, it is tax-neutral.