Understanding a Surviving Spouse’s Option with Respect to a TSP Beneficiary Account – If there is no TSP beneficiary form on file for a TSP account, then the distribution of the TSP participant’s account follows the statutory order of precedence.
Edward A. Zurndorfer–
When a Thrift Savings Plan (TSP) participant dies, the TSP account is distributed according to the TSP participant’s designation of beneficiaries on file with the TSP. If there is no TSP beneficiary form (Form TSP-3) on file for a TSP account, then the distribution of the TSP participant’s account follows the statutory order of precedence.
If a spouse is the designated beneficiary of a TSP participant’s account at the time of the TSP participant’s death, then the TSP will establish a beneficiary TSP account on behalf of the spouse. The spousal beneficiary account will be in the name of the spouse. Note that any non-spousal beneficiaries (such as adult children) will also have beneficiary accounts set up for them, but these accounts are temporary. This is because a non-spousal beneficiary must withdraw all assets in the beneficiary account within five years of the death of the TSP participant.
At the time of the establishment of a spousal TSP beneficiary account, the TSP Service Office will send the surviving spouse a confirmation notice that confirms the account balance and how to access the account. This column discusses the various aspects of a spousal TSP beneficiary participant account including:
- (1) Investment options;
- (2) Withdrawal options; and
- (3) Rollover and transfer options.
Note that TSP beneficiary participants are not permitted to:
- (1) Make contributions to their beneficiary account;
- (2) Borrow (no TSP loans) from their beneficiary account; and
- (3) Rollover/transfer money from other retirement accounts (for example, IRAs, 401(k) and 403(b)) retirement plans) into their TSP beneficiary participant accounts.
Withdrawing Funds Out of a TSP Beneficiary Account
A surviving spouse who owns the TSP beneficiary participant account can keep the beneficiary account as long as he or she wants. With the exception of required minimum distributions (RMDs) when the surviving spouse reaches his or her required beginning date (discussed below), the surviving spouse can keep his or her TSP beneficiary account without making withdrawals. If the surviving spouse wants to withdraw money, he or she has a number of withdrawal options, as discussed next.
Withdrawal Options
There are three options of withdrawing money from a spousal TSP beneficiary account. These options are: (1) Installment payments; (2) Partial/total distributions; and (3) Annuity purchases. These three options are discussed here.
- • Installment payments. TSP installment payments allow the beneficiary participant to receive monthly payments, quarterly (every three months) payments, or an annual payment. These installment payments will continue unless the beneficiary participant requests that they are stopped, or until the TSP account balance is zero. The TSP participant can choose a specific dollar amount, with a $25 minimum) on the monthly payments. Monthly payments can also be based on life expectancy.
- • Partial distributions. Partial distributions of at least $1,000 may be made from a TSP beneficiary account. There is no limit with respect to the number of partial distributions that can be made. Partial distributions can be made from a traditional TSP account, a Roth TSP account or a combination of both accounts. However, the TSP will not process more than one partial or total distribution in any 30-day period. Partial distributions can be requested at the same time the beneficiary account participant is receiving installment payments.
- • Annuity purchase. A TSP annuity pays a check to the beneficiary account participant every month for life. The TSP purchased the fixed annuity on behalf of the beneficiary account participant from a private insurance company. The beneficiary account participant decides how much of the TSP account to purchase for a TSP annuity. The minimum amount for purchasing an annuity is $3,500. The spousal TSP beneficiary account participant can request a TSP annuity with funds coming from the traditional TSP account, from the Roth TSP account, or from a combination of both accounts. Once the TSP account is applied for and purchased, the purchase cannot be revoked.
Taxes on Withdrawals
When a TSP beneficiary account participant withdraws money from his or her TSP beneficiary account, federal income taxes (and state income taxes if living in a state with a state income tax) will be owed on traditional TSP withdrawals. The TSP does withhold federal income taxes (but does not withhold state income taxes) on payments made to a TSP participant.
A TSP beneficiary participant may be able to defer the taxes due on traditional TSP withdrawals by directly transferring a portion or all of the withdrawal to a traditional IRA or to an eligible employer-sponsored retirement plan. Traditional TSP withdrawals can be directly transferred to a Roth IRA, but federal and state income taxes will be due on the full amount of the transfer in the year of the transfer.
IRS Required Minimum Distributions (RMDs)
The Internal Revenue Code (IRC) required individuals who own traditional IRAs and/or qualified retirement plans (such as 401(k) plans), to begin receiving distributions from their accounts every year, starting the year they become age 70.5 (if they were born before July 1, 1949) or starting the year they become age 72 (if they were born after June 30, 1949). These distributions are called required minimum distributions (RMDs). The RMD rules also apply to beneficiary TSP accounts. The TSP will notify a spousal TSP beneficiary account participant each year to inform him or her as to their TSP RMD amount. The TSP will make sure that a beneficiary TSP account participant takes his or her RMD each year no later than the end of every year in which there are RMDs.
TSP Beneficiary Account Death Benefits
Upon the death of the TSP beneficiary account participant, the funds in the beneficiary participant’s account cannot remain in the TSP. The TSP beneficiary account participant should name a beneficiary to his or her beneficiary account. This is done by filling out form TSP-3 (TSP Beneficiary Form), which can be downloaded from www.tsp.gov.
Death benefit payments made from a beneficiary TSP account must be paid directly to the beneficiary participant’s designated beneficiaries. These payments are subject to certain tax restrictions and cannot be rolled over to the designated beneficiary’s own IRA or eligible employer retirement plan. Designated beneficiaries will have to pay the full amount of federal and state income taxes due on traditional TSP distributions.
Inter-TSP Account Plan Rollovers
Those TSP beneficiary account participants who are federal employees or annuitants with their own TSP accounts can request a direct transfer of their beneficiary participant TSP account into their own existing TSP accounts. But an existing TSP account cannot be transferred to a beneficiary TSP account.
Those TSP beneficiary account participants who are under age 59.5 may want to wait before doing an inter-TSP account transfer from a beneficiary TSP account into their own TSP account. Distributions taken before age 59.5 from a civilian traditional TSP account may be subject to a 10 percent early withdrawal penalty. The penalty does not apply to distributions taken from a spousal TSP beneficiary account when the surviving spouse is younger than age 59.5.
With respect to the Roth TSP, Roth TSP earnings when distributed from a Roth TSP beneficiary account are “qualified” (therefore distributed tax-free) provided that five years has passed since January 1st of the year the deceased federal employee first made his or her first Roth TSP contribution. This is called the Roth TSP “begin date.” For Roth TSP earnings from a Roth TSP account to be qualified, in addition to the five-year rule, the Roth TSP participant (including a beneficiary participant) must be age 59.5 or older, permanently disabled or deceased.
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.
