It is crucial to designate a beneficiary for your Thrift Savings Plan (TSP) and any other retirement accounts. Beneficiary designations dictate how death benefits are distributed, regardless of wills, divorce settlements, prenuptial agreements, or court orders.
If no beneficiary is assigned and there is a balance in your TSP account upon death, the account will be distributed according to the following legal order of precedence: first to your spouse, then equally to your children (with any deceased child’s share divided among their descendants), then to your parents equally or to the surviving parent, followed by the executor of your estate. If none of these exist, the account will pass to your next of kin as determined by state law. You can designate up to 20 beneficiaries, which may include individuals, trusts, corporations, estates, or charitable organizations.
Death Benefits Distribution
When a spouse is the beneficiary, a beneficiary participant account will be created in their name, and the funds will be invested as they were in the deceased’s account, except for mutual fund investments, which will be reinvested in TSP funds based on the existing investment instructions. The spouse may retain the balance in their TSP beneficiary account if they choose.
For non-spouse beneficiaries, a temporary account will be established, and funds will be distributed directly to them or to an inherited individual retirement account (IRA). Non-spouse beneficiaries cannot maintain a beneficiary participant account.
Tax Implications
Distributions from traditional TSP accounts are subject to federal income tax, while Roth TSP accounts are generally exempt, provided that at least five years have passed since the first contribution. Spouses can avoid immediate tax liabilities by maintaining the funds in their beneficiary account or by rolling them into an IRA or an eligible employer plan. Non-spouse beneficiaries can similarly defer taxes by rolling over their TSP payment into an inherited IRA. However, they must act within 90 days, or the TSP will liquidate the account and send a check, which cannot be rolled over.
Considerations for Spouse Beneficiaries
If a spouse holding a beneficiary account dies, their beneficiaries cannot continue to maintain the account within the TSP. Payments must be made directly to the new beneficiaries and are subject to tax restrictions. According to TSP Death Plan Benefits bulletin 14-4, such payments cannot be rolled over into an IRA or other eligible employer plans and will be fully taxable in the year they are received.
Many financial planners recommend that spouse beneficiaries transfer their TSP accounts to an inherited IRA or their own IRA. This allows the next beneficiaries to benefit from extended withdrawal timelines under the SECURE Act, potentially providing significant tax savings for future heirs. Daniel Kopp, CFP®, of Wise Stewardship Financial Planning, advises this approach to maximize tax efficiency for military survivors and their beneficiaries.