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One Reason to Consider Moving Your Assets Out of TSP - Estate Planning Thumbnail

One Reason to Consider Moving Your Assets Out of TSP - Estate Planning

Retirement Funding Estate Planning

For a long time, I've been suggesting that Retired and Retiring Senior Military Officers leave the TSP funds in TSP. While recent changes to TSP and their record keeper have made me rethink this position, there is another reason I think you should strongly consider moving your TSP funds...Estate Planning.

It seems to me the government and FRTIB didn't really think about the smooth transition of funds when death occurs. Let's start with some basics.

Who Gets Your TSP Funds When You Die?

If you've designated a beneficiary with TSP, that beneficiary will receive the funds. If you don't designate a beneficiary, the funds will be distributed via the following order of precedence:

  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

It's important to note that your will has no effect on your TSP assets until you get to step 4. In other words, your will may say everything goes to your children, but if they're not designated as the beneficiaries with TSP, the funds will go to your spouse.

How Are Inherited TSP Funds Invested?

Where your funds go and how they are invested will depend on who inherits them.

  • Your Spouse Inherits Your TSP. Your spouse will have 2 choices. He or she can have them transferred to a beneficiary account at TSP. If this occurs, your investments will be reinvested in the Life-Cycle Fund closest to his or her 62nd birthday. Your spouse can re-allocate the funds after he or she take possession of the beneficiary account. Or, your spouse can elect to have the funds transferred (tax-free) to an inherited IRA. The type of IRA, Roth vs Traditional, will depend on how your funds are invested in TSP.
  • A Non-Spouse Inherits Your TSP. The only option available to an heir who inherits a TSP is to roll the funds into an inherited IRA. There is no option to leave the funds inside TSP. The transfer will be tax-free and will be to a like kind account (Traditional or Roth).

What Happens to Inherited TSP Funds When a Spouse Passes Away?

This is the part I really don't like. If your spouse inherits your IRA and transfer to the funds to a TSP beneficiary account, when he or she passes away, the entire balance in his or her account will be paid out to the beneficiaries in a single, fully taxable lump sum. This lump sum distribution could come with a significant tax burden and the taxes paid may be significantly more than if the beneficiary could stretch the distribution over more than one tax year. I don't know about you, but I prefer my money in my pocket versus Uncle's.

Military Finances are Different

TSP is a lot like a 401(k), but it is not the same thing. For instance, you may have a tax-exempt balance in your TSP account. There isn't an equivalent in the civilian world. The differences don't end there. Active and Retired Military Members have carve-outs in the tax code and investments and other financial benefits their civilian counterparts don't have access to. That's why we think you should work with a Financial Planner/Advisor that specializes in your unique circumstances each and every day. If you'd like to see how we do that, click on the button below to schedule a free initial consultation.

If you found this article useful, you might like the following blog posts.

Watch Out for this TSP Tax Trap

I'm About to Retire From the Military. What Should I Do With My TSP?

TSP Loan? Step Away from the Paperwork...Please

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