Things to Consider When Picking a TSP Beneficiary

• What happens if no beneficiary is named when the account owner passes away?
• What choices are available to spousal and non-spousal TSP beneficiaries?
• How to ensure you heirs get the highest net amount from your TSP account.

One of the more important decisions federal workers make in relation to their benefits is determining a beneficiary for their Thrift Savings Plan (TSP) account. If the employee themselves doesn’t choose to designate a beneficiary, then upon death, the remaining TSP money would go to the following, in this order: the deceased’s surviving spouse, then any children, then parents, and then the executor of the estate. If none of those exist, then it would lastly go to the ‘next of kin.’

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Informing TSP of your intended beneficiaries can entail one unintended consequence, and that’s if it’s an ex-spouse. If they’re still listed as beneficiary, then they get the TSP money upon death and not a current spouse or other possible beneficiary. (So keep your beneficiaries up to date!)

Spousal Beneficiary Options

But as long as you keep your beneficiary designation current, then it is almost always best to have a beneficiary on file. If this person is a spouse, he or she can decide to take a lump sum upon the TSP participant’s passing, and that payout might be subject to a mandatory 20% federal tax withholding. A spousal beneficiary can also choose to roll the money into an IRA or another eligible employer plan (like a 401k), or they can leave the funds invested in the TSP by opening their own account when they become a widow or widower.

If a spousal beneficiary decides to keep the money with the TSP, it does not remain in vested in the same allocations of funds as the original TSP participant, but rather the money is automatically invested in the appropriate lifecycle fund that corresponds to the new TSP account owner’s estimated retirement age. After the account is established, the TSP account owner can adjust the investment choices as they see fit, but if the TSP account is still open when this person passes away, their beneficiary must take the inheritance as a lump sum that is subject to taxes.

Non-Spousal Beneficiary Options

When it comes to an original participant’s non-spousal beneficiary, there are only two choices available when the TSP account owner dies. The money can be paid out as a lump sum that could possibly be subject to mandatory federal tax withholding up to 20%. Or, the beneficiary can transfer the funds into an inherited IRA, which can be a complicated vehicle for retirement savings so it is usually recommended that the recipient of the inheritance should discuss this option with a tax professional or the provider of such accounts.

Another thing to go over with a financial professional, for the still-living federal employee at least, is whether it makes sense to transfer out of TSP upon retirement. With changes brought forth by the 2017 TSP Modernization Act, deliberating whether or not to transfer TSP funds out is as dire as it used to be, but there’s still a chance non-spousal beneficiaries receive less money due to taxes if you decided to keep money in the TSP post-retirement.

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Until Next Time,

Picking a TSP Beneficiary