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TSP and Your Estate

TSP and Your Estate

Have you thought about (or researched) what will happen to your Thrift Savings Plan (TSP) when you're no longer around? I're invincible. No reason to worry about that.


Well, while I'm a pretty big fan of TSP I'm not all that "jazzed" with the estate planning ramifications associated with holding TSP for the entirety of your life. You may want to put just a little bit of brain-power on the question of what happens to your TSP account when it's not yours anymore. Here is a primer on what will happen if you don't do anything.


Beneficiary Succession. This one shouldn't be a concern as long as you keep your beneficiary designations up to date. But, if life gets in the way and your designated beneficiary passes away before you and you haven't named contingent beneficiaries you might be surprised with what happens. Unlike a 401(k) or IRA the account won't automatically go to your estate for further distribution. The Federal Government will distribute your money in the following order (100% to the first surviving entity), which may be something you want or don't want.


  1. To Your Spouse
  2. To your child or children equally, and descendants of deceased children by representation
  3. To your parents equally or to the surviving parent
  4. To your appointed executor or administrator of your estate
  5. To your next of kin who is entitled to your estate under the laws of the state in which you resided at the time of your death


Spouse Inherits TSP. If your spouse is named as your beneficiary and you pass away first, the balance of your account will automatically (upon notification of your passing) be transferred to a Beneficiary Account and automatically be 100% invested in the "appropriate" Life-Cycle Fund. The balance will remain 100% invested in the Life-Cycle  Fund until the beneficiary reallocates the funds into a combination of the other available TSP asset classes.


Non-Spouse Inherits TSP. A non-spouse beneficiary cannot leave funds in TSP. The beneficiary or beneficiaries will either be paid directly or can direct that the funds be deposited in an inherited IRA. As with all inherited IRAs the owner cannot make contributions to or roll funds into the account


Owner of a Beneficiary Account Passes Away. This is the one that bothers me the most. Unlike an IRA or 401(k) the balance of a deceased beneficiary's account must be paid out immediately. It cannot be rolled to an IRA or other tax sheltered account. So...if your surviving beneficiary still had significant funds in TSP upon passing the entire amount will be paid out to his or her designated beneficiaries. The entire amount received will be taxed as ordinary income. This could push the recipient into a higher tax bracket and cause them to lose several credits or deductions. It is certainly possible that the payout could be taxed at near 50%. If payout was not forced in a single year, like an IRA, then the recipient of the remaining TSP balance could "stretch" out the payments over his or her lifetime and potentially pay significantly less in taxes.


Again, overall I like TSP. In most cases, I recommend that clients keep their TSP accounts open and remain invested there. But as distributions begin and the possibility of someone inheriting a TSP balance becomes more real it is certainly worth considering whether a move from TSP (most likely to an IRA) is right for you.

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