Any taxable portions of your TSP annuity payments will be taxed as ordinary income in the years when you receive them. However, these annuity payments are not subject to the IRS early withdrawal penalty.
Your beneficiary participant account may contain one of several kinds of nontaxable funds:
- Roth contributions (on which taxes were already paid)
- Qualified Roth earnings (paid tax-free when withdrawn)
- Traditional tax-exempt contributions from combat zone pay
The annuity vendor will calculate the taxable and nontaxable portion of each payment based on the proportion of your account that was used to purchase the annuity.
For more information, read the TSP tax notice “Important Tax Information About Payments From Your TSP Account.”