TSP rollover taxes and penalties

Everything here comes from the TSP's booklet Tax Rules about TSP Payments (TSPBK26, October 2026) and irs.gov. It describes the rules; how they apply to your return is a question for a tax professional.

Direct or indirect: the choice that decides the tax

In a direct rollover you give the TSP the IRA custodian's details and the TSP pays the custodian. For traditional money going into a traditional IRA, the booklet says it "will not be taxed in the current year, and no income tax will be withheld." You pay tax later, when you take money out of the IRA.

In an indirect rollover the TSP pays you, and you put the money into the IRA yourself. Then:

• The TSP must withhold 20% of the taxable amount for federal income tax, more if you ask, never less. Withholding is a prepayment toward your tax for the year, not the tax itself (IRS Publication 721).
• You have 60 days from receiving the payment to deposit it.
• To roll over the full amount, you make up the withheld 20% from your own pocket.

The booklet's own example: you take $10,000 and want to roll it all over. The TSP withholds $2,000 and sends it to the IRS; you receive $8,000. To roll over $10,000 you add $2,000 from savings and deposit the lot within 60 days. The $2,000 sent to the IRS counts as tax paid: in the IRS's version of this example, the taxpayer reports $10,000 as a nontaxable rollover and $2,000 as taxes paid. Whether that ends in a refund depends on the whole return. Whatever you don't deposit in time is taxed, and may also carry the 10% early withdrawal tax if you are under 59½.

The IRS can waive the 60-day requirement if you missed it for reasons beyond your control; don't plan around it.

Withholding by type of TSP payment

The percentages apply only to the taxable part of a payment. For traditional money that is normally all of it, tax-exempt combat-zone money aside. A qualified Roth payment (after a five-tax-year period of participation, and at 59½ or later, or on disability or death) isn't income at all, and IRS Publication 721 says no withholding is required on it. A nonqualified Roth payment is part contributions, not taxed again, and part earnings; paid to you as an eligible rollover distribution, it has 20% withheld from the earnings only (TSPBK26).

The TSP doesn't withhold state or local income tax. That doesn't mean none is due: it reports every payment to your state of residence at the time, if the state has an income tax. Every withdrawal and distribution is reported to the IRS and to you on Form 1099-R.

The 10% early withdrawal tax

Before 59½, the taxable part of a TSP payment that isn't rolled over can carry an extra 10% tax. A rollover itself never triggers it. The TSP booklet lists the exceptions; these are the ones most federal employees meet:

• Payments after you separate from service during or after the year you reach 55.
• For public safety employees as defined in section 72(t)(10)(B)(ii) of the tax code, payments after separating during or after the year you reach 50, or once you have 25 years of service under the TSP. The IRS lists federal law enforcement officers, firefighters, customs and border protection officers, corrections officers and air traffic controllers among them.
• Payments because of total and permanent disability, or death.
• Installments based on life expectancy, with a catch: stop them or take extra money within five years, or before 59½, and the tax can be applied retroactively.

The catch for gold IRAs: the IRS table of exceptions marks the separation-from-service exception as applying to qualified plans and not to IRAs. Money you roll out of the TSP loses it. For someone who left at 55 or later, cash needed before 59½ becomes part of the rollover decision, and how the rule plays out on your return is a question for a tax professional.

Roth money and conversions

Roth TSP money rolled directly into a Roth IRA isn't taxed in the year of the rollover and nothing is withheld. Traditional money rolled into a Roth IRA is a conversion: the full amount is taxable in that year, and because the TSP withholds nothing on it, you may need to pay estimated tax to make sure you pay enough during the year. Details on the Roth page.

RMDs

Required minimum distributions from traditional TSP money begin at 73 if you were born before 1960, and 75 if you were born in 1960 or later, once you have left federal service. RMDs can't be rolled over. In a year you are subject to one, the TSP pays the RMD to you before it lets you roll anything over. Missing an RMD can mean a 25% excise tax on the shortfall, cut to 10% if corrected within two years, per the IRS.

A traditional gold IRA brings RMDs of its own, and the metal pays no cash. That doesn't have to mean selling metal every year. The IRS has an owner of several traditional IRAs calculate each account's RMD, then lets the total come from one or more of them (RMD FAQ, question 5), so a traditional IRA held in funds can generally cover the gold IRA's share. Only a gold IRA that is the sole traditional IRA must pay its own, by selling metal or distributing coins. The same FAQ says 401(k)-type plans don't aggregate, so the TSP's RMD still comes from the TSP.

The rule that can turn a purchase into a distribution

IRC 408(m) treats most metals and coins as collectibles. If an IRA buys a collectible, the IRS treats the cost as a distribution in that year: taxable, with the 10% additional tax possible under 59½. The exceptions are certain U.S. gold, silver and platinum coins, coins issued under state law, and gold, silver, platinum or palladium bullion of a certain fineness that a bank or approved non-bank trustee physically holds. That last condition is why IRA gold can't sit in your safe at home.

For how dealers price what goes into the IRA, see Goldco fees on Gold IRA Companies Ranked; the same site has a general guide to rolling a workplace plan into a gold IRA, and its overview deals with 401(k)s.