Over the course of your federal career, you’re likely to build a healthy balance in your Thrift Savings Plan. With low administrative fees and several funds from which to choose, it’s a valuable benefit for federal employees. And while no one enjoys discussing death, it’s inevitable, so it’s important to have a plan in place for your TSP.
Make Sure You Designate a Beneficiary
Designating a beneficiary dictates who will take control of the money after you die. This designation can not be overridden by a will, prenuptial agreement, property settlement, or court order. If you have no designated beneficiary, the funds in your TSP will be distributed according to the Order of Precedence. Make sure your beneficiary information is accurate, up-to-date, and reflects any recent life changes.
Spouse Beneficiary
If you designate your spouse as a beneficiary, after your passing a beneficiary participant account will be set up in his or her name. This is basically a carbon copy of your TSP except any money invested in the mutual fund window will be reinvested in the TSP in accordance with your fund allocation election. Your spouse will then be able to take control of the account, manage asset allocation, or roll it into an IRA or eligible employer plan. The money in the beneficiary participant account is not subject to federal income tax until it is withdrawn.
Keep in mind that you can’t make contributions to, borrow from, or roll money into a beneficiary participant account. After your spouse beneficiary passes away, any remaining funds in the beneficiary participant account cannot remain in the TSP or be rolled over into any type of IRA.
Non-spouse Beneficiary
If your beneficiary is not a surviving spouse, they can’t keep a TSP account. Instead, a temporary account will be established and payment will be made directly to them or an inherited IRA. Non-spouse beneficiaries have 90 days to request the funds from the temporary TSP or the payment will be automatically sent once that period expires. Money distributed from a traditional TSP is subject to mandatory federal income tax.
Minimizing Taxes
Why stop at simply choosing a beneficiary when you can put a plan in place to minimize their tax burden? Designating your spouse as a beneficiary might alleviate the tax bill for them, but when they pass away their beneficiary will owe Uncle Sam taxes on their distribution. Speak with a certified Federal Retirement Consultant® (FRC) who can tailor a strategy to protect your legacy.
