When your spouse is your TSP beneficiary, the TSP death benefit rules are straightforward. However, things get more complicated when you elect a non-spouse or forget to name a beneficiary at all.
When Your Spouse Is Your TSP Beneficiary
Once your surviving spouse is confirmed as your TSP beneficiary, a Beneficiary Participant Account (BPA) is established in their name and the account balance is invested solely in the G-Fund. Once the account is established, your beneficiary can make withdrawals and request inter-fund transfers like other TSP participants. However, beneficiaries are not eligible to make contributions to their BPA or take out TSP loans.
The same TSP withdrawal rules apply to a BPA. This includes taxes due on all distributions from a traditional TSP balance, early withdrawal penalties, and Required Minimum Distributions (RMDs). A spouse beneficiary must elect their own beneficiary should they pass away but the new beneficiary cannot keep funds in the TSP and the death benefit cannot be rolled over into any type of IRA.
When A Non-Spouse Is Your TSP Beneficiary
When a TSP beneficiary is not your surviving spouse, they cannot keep any funds in the account. A temporary TSP account is set up and they have90 days to request payment. If they don’t initiate payment within 90 days, the TSP will automatically send them the lump-sum payment on the 90th day or next business day. Payment from this account can be made directly to a non-spouse beneficiary or rolled over to an inherited IRA.
“Keep in mind that your spouse or non-spouse may also owe state taxes on any traditional TSP balance they inherit depending on where they live.”
Taxes On Death Benefit Distributions
Since contributions to a traditional TSP account are made with tax-deferred earnings, 100% of death benefit distributions are subject federal income taxes for the year in which the distribution was made. Keep in mind that your spouse or non-spouse beneficiary may also owe state taxes on an inherited TSP depending on where they live.
Outstanding TSP Loans When You Pass Away
If you pass away with an outstanding TSP loan, death benefits will not be distributed to your beneficiary until the outstanding amount has been foreclosed on. Then the loan will be declared as taxable income to your estate, not to your beneficiaries. Note: your estate or survivors cannot repay a TSP loan.
Updating Your TSP Beneficiary
The best way to update your TSP beneficiary form is to file a new one online when you log in to “My Account.” Keep in mind, if you don’t designate a TSP beneficiary at all, your account will be paid according to the OPM’s Order of Precedence. For complete information download, TSP Death Benefits.
