This is the third of three FEDZONE columns presenting guidance for family members of deceased annuitants (federal employees who retired and receiving either a CSRS or FERS annuity at the time of their death) and the tasks that have to be performed in order for surviving family members to receive survivor benefits. This column discusses survivor death benefits from the Thrift Savings Plan (TSP).
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Designating a TSP Beneficiary
A TSP participant is highly encouraged to designate a beneficiary of their TSP account. By designating a TSP beneficiary, the participant fully controls who will receive the money in the participant’s account at the time of his or her death. Up to twenty beneficiaries of a TSP account can be designated. These beneficiaries include individuals, a revocable living trust, a corporation, one’s estate or another legal entity (such as a charity).
In order for the TSP to honor a TSP beneficiary designation, Form TSP-3 (Designation of Beneficiary) must be on file with the TSP at the time of the TSP participant’s death. The TSP cannot honor a will or any other document as a substitute for the TSP-3 beneficiary form.
If a TSP participant’s spouse is named as a beneficiary of the TSP participant’s account, then at the TSP participant’s death, the TSP will establish a beneficiary participant account in the spouse’s name. The money in the beneficiary participant account will be invested just as it was in the TSP participant’s account, except for any money the TSP participant had invested in the TSP “mutual fund window”. Money from the “mutual fund window” will be reinvested in TSP funds according to the TSP participant’s election on file. If the surviving spouse’s share is less than $200, then the surviving spouse can request payment within 90 days prior to automatic force-out.
It is a good idea for TSP participants to annually review how they have designated their beneficiaries. By law, the TSP must pay out inherited TSP funds to properly designated beneficiaries under all circumstances. For example, if a spouse is designated as a beneficiary, then that spouse will still be entitled to death benefits even if the TSP participant separated or divorced that spouse and did not change the beneficiary designation. This is the case, even if the spouse designated as a beneficiary gives up all the rights to the TSP participant’s account.
If a TSP participant’s life situation changes, or if any of the designated beneficiaries change their address, then the TSP participant is encouraged to file an updated Form TSP-3 that changes the current Form TSP-3 on file.
TSP Death Benefits
- Notifying the TSP. Upon the death of a federal annuitant who was a TSP participant, the TSP participant’s survivors should contact the TSP using one of the following ThriftLine Service Center options:Phone: 1-877-968-3778 (US) 1-404-233-4400 (Outside the US, not toll-free)
Fax: 1-276-926-8948
Mail: ThriftLine Service Center
c/o Broadridge Processing
PO Box 1600
Newark, NJ 07101-1600
- Determining beneficiaries. If there was a beneficiary designation on file with the TSP on the date of the TSP participant’s death, the TSP will distribute according to that designation. Otherwise, the account will be paid according to the order of precedence required by law: (1) To the participant’s spouse; (2) If none, to the participant’s child or children, equally, with the share due any deceased child divided equally among that child’s decedents; (3) If none, to the participant’s parents, equally to the surviving parent; (4) if none, to the appointed executor or administrator of the participant’s estate; or (5) If none, to the participant’s next of kin who is entitled to the participant’s estate under the laws of the state in which he or she resided at the time of death. Once the TSP has determined the identity of the beneficiaries, the TSP will mail each beneficiary a notice of their beneficiary status. The TSP will establish a TSP account for each beneficiary. Each beneficiary will also receive the TSP Payment Rights Notice, which explains a beneficiary’s tax obligations.
Where TSP Death Benefit Payment Is Sent
- Spouse beneficiary. If a spouse is determined to be the beneficiary of part or all of a TSP account, the TSP will establish a beneficiary participant account in the spouse’s name. The money in the beneficiary participant account will be invested initially as it was in the deceased participant’s account, except for monies in the mutual fund window. The money in a beneficiary participant’s account is not subject to federal income tax until it is withdrawn.
- Non-spouse beneficiary. A beneficiary who is not a surviving spouse cannot retain a TSP account. The TSP will establish a temporary online TSP MyAccount (at https://www.tsp.gov) on behalf of the non-spouse beneficiary. Payment from this account will be made directly to a non-spouse beneficiary or to an “inherited IRA”. These two payment options are discussed:
- Payment to non-spouse beneficiary. A non-spousal beneficiary will be able to access their temporary TSP MyAccount on the TSP web site at www.tsp.gov in order to request within 90 days a death benefit disbursement to be made via a check or deposited into a checking or savings account.
- Direct rollover of the inherited TSP account to an “inherited” IRA. A non-spousal beneficiary will be able to access their temporary TSP MyAccount on the TSP web site at www.tsp.gov in order to request within 90 days a direct rollover of the death benefit to an “inherited” IRA. In particular, a direct rollover of an inherited traditional TSP account can be made to an “inherited” traditional IRA and a direct rollover of an inherited Roth TSP account can be made to an “inherited” Roth IRA.
Note that if the beneficiary does not make a payment election within 90 days after receiving the determination election package, the account will be automatically cashed out and a check will be mailed to the named beneficiary.
Taxes and TSP Death Benefits
The tax consequences of receiving a TSP death benefit payment are determined based on the source of money that is included in the payment (traditional TSP or Roth TSP), the type of account from which the payment is made (civilian, uniformed services, or beneficiary participant) and the type of beneficiary (spouse or non-spouse).
- Source of money in payment. The deceased TSP participant’s account may contain funds from the traditional TSP; composed of before-tax monies and therefore fully taxable; composed of some tax-exempt monies, if the TSP participant served in the uniformed services and contributed to the TSP while serving in a combat zone; or composed of rollover contributions of qualified Roth monies from an employer-sponsored Roth retirement plan such as a Roth 401(k) plan and therefore not taxable. All death benefit payments will be disbursed proportionately from any traditional and Roth IRA money in the TSP participant’s account. Any traditional TSP money that is disbursed will be subject to mandatory federal income tax withholding. Note that if the deceased TSP participant was a uniformed service member with tax-exempt payroll contributions in a traditional TSP balance, those contributions will not be subject to tax but the earnings on those contributions will be subject to taxes.
Any Roth TSP contributions that may be part of a death benefit payment are not subject to federal income tax. Earnings on Roth TSP contributions will also be disbursed tax-free, if five years have passed since January 1st of the year the deceased Roth TSP participant made his or her first Roth TSP contribution.
- Type of Account. The taxable amount of any death benefit payment made to beneficiaries, both spouse and non-spouse, is subject to automatic federal income tax withholding and is fully taxable in the year distributed. These payments are made directly to the beneficiaries and cannot be rolled over to any type of IRA or retirement plan. The beneficiary is responsible for paying the state income taxes due on the death benefit payment. This is because the TSP does not withhold state income taxes.
- Type of beneficiary. Spouse beneficiaries of civilian and uniformed services accounts have different options from non-spouse beneficiaries. A spouse beneficiary whose inherited share is at least $200 can avoid the mandatory withholding and defer tax liability by keeping the funds in the established beneficiary participant account. A non-spouse beneficiary can avoid mandatory withholding and defer the tax liability requesting that the TSP directly rollover all or part of the payment directly to an “inherited” IRA. However, the rules governing inherited IRAs are complicated and there are restrictions. Non-spouse beneficiaries of TSP accounts who want to directly rollover their inherited TSP accounts to an “inherited” IRA are therefore encouraged to speak with a qualified tax professional before requesting a direct rollover of their inherited TSP account to an “inherited” IRA.
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Edward A. Zurndorfer is a CERTIFIED FINANCIAL PLANNER™ professional, Chartered Life Underwriter, Chartered Financial Consultant, Chartered Federal Employee Benefits Consultant, Certified Employees Benefits Specialist and IRS Enrolled Agent in Silver Spring, MD. Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, and EZ Federal Benefits Seminars, located at 833 Bromley Street - Suite A, Silver Spring, MD 20902-3019 and telephone number 301-681-1652. Raymond James is not affiliated with and does not endorse the opinions or services of Edward A. Zurndorfer or EZ Accounting and Financial Services. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.
