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Will I be taxed on a TSP (Thrift Savings Plan) settlement if I purchase a house with that money?

Charleston, WV |

I did not get the house...he did. I am getting a settlement out of his TSP account. I want to use this money to put down on a house. Will I be taxed on this money if I do that, and how does it work? I have read some places that IRA or other type account settlements can have a tax amount of up to 35%. Lets say for argument's sake my settlement is $50,000. Does that mean I will have to pay a lump sum tax of $17,500 when I get that money? Is that still the case if I am going to use that $50,000 as a down payment?

I am getting a settlement out of his TSP, I am getting "1/2" of it. I want to get a cash payout. I want to take that money and use it to buy a house. I am sure there will be a penaltly for getting the money paid out to me versus rolling it into an IRA. I know that. What I am TRYING to find out is if I do get the cash payout, will it be taxed? Is it taxed as income, just tacked onto my yearly income at the end of the year? Is it taxed separately? If it is, how much am I looking at in tax percentage, 10%? 35%? If I use that money to buy real estate, does that have any bearing on how it is taxed?

Attorney Answers 1

Posted

You should have a QDRO (Qualified Domestic Relations Order) regarding IRA / Retirement Accounts. The QDRO will address the taxation of the portion of the plan that is distributed to you. Typically, this money has not been previously taxed and any distributions you take will be taxed at ordinary income rates. If you are not yet 59 1/2 there will also be a 10 percent penalty.

Any individual seeking legal advice for their own situation should retain their own legal counsel as this response provides information that is general in nature and not specific to any person's unique situation. Circular 230 Disclaimer - Advice given in this response cannot be used to eliminate penalties with the IRS or any other governmental agency.

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I have done some research, and found a government "Publication 575" that references QRDO's, and from what it says "Certain early distributions are excepted from the early distribution tax. The tax does not apply to distributions that are: From a qualified retirement plan to an alternate payee under a qualified domestic relations order." But, that is not what I was asking about. I was asking specifically about the "income tax" portion, *if* I use the settlement money to purchase real estate instead of rolling it into the IRA account. I was hoping to find out if that money is used to purchase a home, is there a break on the income tax assesed. Thank you kindly for your reply, I appreciate your time.

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