Tax free income to TSP then out early?

[Possi]

Why would anyone put money earned in a tax free zone into a TSP, only to take it out prematurely, subjecting it to ordinary tax AND the 10% penalty?

Am I missing something?

[Bonnie]

They just totally don't understand.

[Possi]

Frothed

They are FROTHED at the financial planner that let this happen!
One false move and POW, untaxed dollars are not only taxed, but they are hit with a penalty.

[Gary2]

I'm not sure about the "tax free zone" part, but combat pay put into the TSP effectively creates a basis, and can be removed tax free.

[Possi]

tell me more

It was paid while in a tax free zone, and I believe it was paid as combat pay. Where do I go to qualify it as a tax free distribution. I would have to either get the 1099 changed to show that, or qualify it on the 1040 in some way.

edit: It was, indeed paid while in a combat zone.

[Gary2]

Pub. 3 says that the TSP program should provide a statement showing the taxable and non-taxable amounts.

[Possi]

Can't find it

I swear, I can't find it.
Should I get the TSP to re-issue a corrected 1099??

[Gary2]

I swear, I can't find it.
Should I get the TSP to re-issue a corrected 1099??

Can't find where Pub. 3 says that? It's on page 5. (Download the latest from the IRS web site and just search for TSP inside Adobe Reader.)

The text refers the reader to www.tsp.gov for more info. I read it as saying that the TSP statement is separate from the 1099-R. It doesn't say anything about how it's calculated or reported, but my guess is that it's closer to the treatment of non-deductible traditional IRA contributions (i.e. a proportionate share isn't taxed) than to Roths (where contributions come out before earnings).