Throughout your federal career, your Thrift Savings Plan (TSP) balance is likely to grow into a significant asset. With its low administrative fees and a range of investment options, the TSP is a valuable benefit for federal employees. While it’s not pleasant to think about, having a plan for your TSP in place is crucial, as it ensures your assets are distributed according to your wishes when you’re gone.
Designating a Beneficiary
Designating a beneficiary determines who will inherit your TSP funds upon your death. This designation takes precedence over any will, prenuptial agreement, property settlement, or court order. If you do not designate a beneficiary, your TSP funds will be distributed based on the Order of Precedence. It’s important to keep your beneficiary information up-to-date, especially after major life events like marriage, divorce, or the birth of children.
Spouse Beneficiary
If you name your spouse as your beneficiary, they will inherit your TSP in the form of a beneficiary participant account. This account mirrors your TSP, but any investments in the mutual fund window will be redirected to your regular TSP fund allocations. Your spouse can then take control of the account, adjust asset allocation, or roll it over into an IRA or eligible employer-sponsored plan. The funds in the beneficiary participant account are not subject to federal income tax until withdrawn. However, contributions, loans, or additional rollovers are not allowed into this account, and once your spouse passes, the remaining balance cannot be kept in the TSP or rolled into an IRA.
Non-Spouse Beneficiary
If a non-spouse is named as the beneficiary, they cannot maintain the TSP account. Instead, a temporary account will be set up, and the funds will be paid directly to the beneficiary or transferred to an inherited IRA. Non-spouse beneficiaries must request the funds within 90 days; otherwise, payment will be automatically issued. Distributions from a traditional TSP are subject to mandatory federal income tax.
Minimizing Tax Implications
While selecting a beneficiary is important, planning ahead to minimize their tax burden is equally essential. Naming your spouse as a beneficiary may reduce the tax impact for them, but when they pass, their beneficiary will still face taxes on the distribution. Consulting a certified Federal Retirement Consultant (FRC®) can help you create a strategy to protect your legacy and reduce the tax burden on your beneficiaries.
