A withdrawal from your Thrift Savings Plan is not considered earned income. The IRS defines earned income as pay for work you personally perform, meaning wages, salaries, professional fees, tips, and net self-employment earnings. A TSP distribution fails that test because no one is paying you for current labor; you are drawing down savings built from past paychecks. The Office of Personnel Management states the classification directly: TSP and 401(k) withdrawals are not earned income.1U.S. Office of Personnel Management. Is a TSP or 401K Withdrawal Considered Earned Income? For tax and benefit purposes, they sit in the same bucket as pensions, interest, and dividends. The classification holds whether you take a lump sum, monthly installments, or a life annuity through the TSP.
The One Exception: Disability Retirement
There is a narrow situation where retirement money does count as earned income. If you retired on disability, payments from your employer’s disability retirement plan are treated as earned income until you reach the age at which you would have been eligible for a regular pension. After that date, the payments convert to pension income and lose their earned-income status.2Internal Revenue Service. Earned Income Outside that window, the general rule applies and a TSP distribution is not earnings.
What This Means for the Social Security Earnings Test
The Social Security Administration reduces benefits for people who claim before full retirement age and keep earning above an annual limit. In 2026, that limit is $24,480 for beneficiaries who are under full retirement age for the entire year, with $1 withheld for every $2 above the threshold. A higher limit of $65,160 applies in the calendar year you reach full retirement age, with $1 withheld for every $3 above it. Once you hit full retirement age, the test ends and the SSA recalculates your benefit to credit the months previously withheld.3Social Security Administration. Receiving Benefits While Working
TSP withdrawals do not count toward either limit. The earnings test looks only at wages and net self-employment income; pension payments, investment returns, and retirement plan distributions are excluded.4Social Security Administration. Program Explainer: Retirement Earnings Test You can take a six-figure TSP distribution in a year you are collecting early Social Security without losing a dollar of your check to the earnings test.
What This Means for IRA Contributions
Contributing to a Traditional or Roth IRA requires taxable compensation, which the Internal Revenue Code defines as wages, salaries, professional fees, and similar pay for personal services. Pension and annuity income is specifically excluded, and so is deferred compensation from a plan like the TSP.5Office of the Law Revision Counsel. 26 USC 219 – Retirement Savings If your only income comes from TSP withdrawals, you cannot contribute to an IRA on your own earnings.
For 2026, the IRA contribution limit is $7,500 per person, or $8,600 if you are 50 or older, and it cannot exceed your taxable compensation for the year. Even a small amount of earned income from part-time work opens the door. Contributing more than you are eligible for triggers a 6% excise tax on the excess amount for every year it stays in the account.6Internal Revenue Service. Retirement Topics – IRA Contribution Limits
Married retirees have a workaround. If you file jointly and your spouse has earned income, you can make a “spousal IRA” contribution even with no earnings of your own. Each spouse can contribute up to the annual limit, provided the couple’s combined contributions do not exceed the total taxable compensation on their joint return.6Internal Revenue Service. Retirement Topics – IRA Contribution Limits
Earned Income Tax Credit
The EITC is available only to taxpayers with earned income below certain thresholds. A retiree living entirely on TSP withdrawals has zero earned income for EITC purposes and cannot claim the credit. There is a trap on the other side too: the EITC has an investment income limit of $11,950 for tax year 2025, and TSP distributions count toward that test. A retiree who works part-time and would otherwise qualify can lose the credit by taking a large enough withdrawal in the same year.
What “Not Earned Income” Does Not Save You From
The classification helps in specific places. It does not turn a TSP withdrawal into free money. Three consequences catch retirees off guard.
The Withdrawal Is Still Taxable Income
Every dollar drawn from a Traditional TSP balance is taxed as ordinary income at your federal rate for the year. A large one-time withdrawal can push you into a higher bracket, which is why many retirees spread distributions across multiple years. Roth TSP contributions come back tax-free, and the earnings are also tax-free if the distribution is “qualified”: at least five years have passed since January 1 of the year you made your first Roth TSP contribution, and you are at least 59½, permanently disabled, or deceased. If either condition is unmet, the earnings portion is taxed as ordinary income.7TSP.gov. Changes to Tax Rules About TSP Payments
Your Social Security Benefits Can Become Taxable
While TSP distributions do not reduce your Social Security check through the earnings test, they can cause more of that check to be taxed. The IRS uses a formula called “combined income” (your adjusted gross income, plus nontaxable interest, plus half your Social Security benefits) to determine how much of your benefits are subject to federal tax. Traditional TSP withdrawals raise your adjusted gross income and push combined income up.
The statutory thresholds, unchanged since 1993, are:
- Single filers: combined income above $25,000 makes up to 50% of benefits taxable; above $34,000, up to 85%.
- Married filing jointly: combined income above $32,000 triggers the 50% tier; above $44,000, up to 85%.
Because the thresholds are not indexed for inflation, a modest TSP withdrawal is often enough to push a retiree from the 50% tier into the 85% tier. Drawing from a Roth TSP balance, where qualified distributions do not count toward combined income, helps manage this.
Your Medicare Premiums Can Jump
Large TSP withdrawals can raise your Medicare premiums through the Income-Related Monthly Adjustment Amount, or IRMAA. Medicare uses your modified adjusted gross income from two years prior to set your current premiums, so a big distribution in 2024 shows up in your 2026 premium. For 2026, the standard Part B premium is $202.90 per month, and single filers with MAGI above $109,000 (or joint filers above $218,000) begin paying surcharges that climb through several tiers, reaching $689.90 per month for Part B and $91.00 for Part D at the top bracket.8Centers for Medicare & Medicaid Services. 2026 Medicare Parts A and B Premiums and Deductibles At the highest tier, a couple pays nearly $19,000 more per year in premiums than someone at the standard rate. The two-year lookback means a one-time withdrawal hits your premiums long after you have spent the money.
The short version: for Social Security’s earnings test and IRA contribution eligibility, a TSP withdrawal is not earned income and behaves accordingly. For your federal tax return, the taxation of your Social Security benefits, and your Medicare premium bracket, the withdrawal still counts as income and can move real numbers. Planning the size and timing of distributions matters for the second set of rules even though the first set treats them as invisible.