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 Dear Tax Talk:
I was awarded disability retirement in 2006 from the IRS. I am currently receiving income from the IRS workers' compensation, but I was still granted disability through the IRS. Do I need to pay the 10-percent penalty for early distribution from my thrift savings account with the IRS?
-- Ella
 Dear
Ella,
The Thrift Savings Plan, or TSP, provides federal
employees with the same savings and tax benefits
that many private employers offer their employees.
This plan is similar to private-sector 401(k)
plans. You can defer tax on part of your pay by
having it contributed to your account in the plan.
The contributions and earnings on them are not
taxed until they are distributed to you.
Federal Employees' Compensation Act payments you receive for personal injuries or sickness resulting from the performance of your duties are like workers' compensation. They are tax-exempt and are not treated as disability income or annuities. However, payments you receive while your claim is being processed, including pay while on sick leave and continuation of pay for up to 45 days, are taxable.
Most distributions (both periodic and nonperiodic) from qualified retirement plans made to you before you reach age 59½ are subject to an additional tax (penalty) of 10 percent. Exceptions to the additional tax apply if your payments are received while totally and permanently disabled.
You are permanently and totally disabled if you cannot engage in any substantial gainful activity because of your physical or mental condition. A physician must certify that the condition has lasted or can be expected to last continuously for 12 months or more, or that the condition can be expected to result in death.
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