I've been trying to find a good answer to this on the net and until I meet with a tax advisor I wanted to get some feedback here on withdrawing from my 401K and taxes.  I retired from government service at 57 years old under CSRS and was able to put a good chunk into the 401K and its still there and not rolled over yet.  I took out money last year to pay off some cards and got taxed at 20%, expected and no problem here.

Now it turns out I may need to get some more money out and getting confused on the 10% tax penalty.  I know there's an exception to the penalty  if you retire after age 55, that's why they only took the 20% tax.

I may be reading the information wrong but,

Will I continue to get taxed at 20% and do I get the penalty after 59 1/2 (I'm 58 now)?  Seems like some information, IRS and others,  I read brings up the 10% penalty after 59 1/2 but I cant tell if it applies to me.  So far the best answer I got from the TSP people holding my 401K is that I continue to get taxed at 20% no matter what if I leave it alone without rolling over and I retired at or after 55.  If I had retired at 54 then the penalty comes in, this has been the simplest and seemingly best answer.

Right now I'm thinking that it doesn't make sense to tax you at 20% between 55 and 59 1/2 and then penalize you afterwards because you got older.  Assuming the money stays where it is and doesn't go into something else that screws up the taxes.

I don't want to touch the money but loans are out of the question, I'm trying to stay away from debt.  Thanks for looking.

Not to be mean,  but had you tried calling the tsp?

I'm going to call TSP again and double check, wont be the first time 2 people at the same location gave 2 different answers. Aside from that I also called a financial advisor at USAA and they said to leave the 401K as is and take disbursements with a 20% tax and no penalty.  If I tried to get the money out of an IRA then I would get the 10% penalty.

This is not advice but read your plan summary, it's all in there. The 20% is probably mandatory federal tax withholding on distributions. 401ks and IRAs play by similar but different rules.

FWIW, note that you may be able to take out a loan w/o any tax penalty.  Well, maybe you can't now that you are retired, I dunno.  When you are working, you can take a loan agains a 401k for any reason.  You pay your self interest.  If you leave your job you then have to pay the loan off in full w/in 60 days or face the early withdrawl tax penalties.

Any possible way you can wait until your 59 1/2 ? There is no avoidng the mandatory tax withold but the penalty goes away at 59 1/2

Sepp ftw. That is substantially equal periodic payments.

So you'll always owe normal income tax on withdrawals. If you take out sepp you will not owe the 10% penalty. I am drinking and not a lawyer.

The 10% penalty is only if you take a withdrawal before 59-1/2.  There there is no penalty after 59-1/2.  Your date of retirement is not relevant.  All withdrawals are taxed at your marginal tax rate (the rate you would pay on the very next dollar you make.)  They may have withheld 20%, but that's not the tax rate.

As has been said above, your date of retirement/age at retirement doesn't matter to your 401k withdrawals. All that matters is the age that you are now. If you are at least 59 1/2 years old then they will take the 20% in taxes, but then you will either owe additional tax or get an additional refund when you file your taxes for that year. Your net tax will be your normal tax rate according to your income.

There are certain circumstances under which you can make a withdrawal prior to age 59 1/2 without having to pay the additional 10% penalty. Check your plan documentation and all of those scenarios should be listed. It would be highly advantageous to roll the 401k over to an IRA.

Lots of advice and none of it researched or correct.

http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics---Tax-on-Early-Distributions
Start here.  Note the last exception for 401k, Separation from Service.  

If you retired after 55 you will not pay the 10% penalty for early distributions.

For credibility sake, I am an EA.

TSP is a unique animal, not quite the same as a 401K that is available in private sector.  Here's some info on that from the horses mouth:

Linky:
https://www.tsp.gov/lifeevents/entering/enteringRetirement.shtml