If a Thrift Savings Plan account holder dies, his/her account will be inherited by his/her beneficiary. Participants can designate a beneficiary on Form TSP-3 (which can be found on the TSP website). If there is no designated beneficiary, the Thrift Plan follows the standard order of precedence for federal benefits.
That order is:
• Spouse;
• Child or children equally, with the share due any deceased child divided equally among that child’s descendants;
• Parents;
• Appointed executor or administrator of your estate;
• 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.
If your beneficiary is your spouse, and your TSP balance is $200 or more, the TSP will set up a beneficiary participant account in his/her name. Non-spousal beneficiaries are not allowed to keep their money in the Thrift Savings Plan. The owner of a beneficiary participant account will not be able to make any contributions to, borrow from, or transfer money into the inherited account. They will be able to withdraw from the account and to make interfund transfers.
Regardless of how your TSP account was invested, your spouse’s beneficiary participant account will be invested in the age-appropriate Lifecycle (L) Fund. Because beneficiary participants are allowed to make interfund transfers, they are free to reallocate the investments based on TSP rules.
In addition to this general information, there is specific information that applies to beneficiary participant accounts.
If your beneficiary has an existing TSP account of their own, they are allowed to transfer the beneficiary participant account into their personal TSP account. But wait; they can’t do the reverse! They cannot roll or transfer an existing TSP account (as well as an outside IRA or other retirement plan) into a beneficiary participant account.
There are other rules that deal with combining regular and beneficiary participant accounts. If there is a Roth balance in either account the “Roth initiation date” (this date is used to determine whether or not Roth earnings are qualified) would be the earliest date a Roth TSP was initiated, regardless of whether the date applies to the regular account or the beneficiary account.
If you are younger than 59 ½ at the time you inherit a beneficiary participant account, Roth rules bring up another caveat in deciding whether or not to combine it with your regular TSP account. With few exceptions, withdrawals taken prior to age 59 ½ in regular TSP accounts are subject to a 10% early withdrawal penalty. Beneficiary participant accounts have no such penalty.
Regarding withdrawals, the rules that apply to regular TSP accounts also apply to beneficiary participant accounts. When the withdrawal is a required minimum distribution RMD), the distribution is based on whether or not the deceased participant has reached their “required beginning date”. The required beginning date is April 1 of the year after the deceased participant would have turned 72 (70 ½ for those born prior to July 1, 1949).
If the participant died before his/her required beginning date, the beneficiary must begin receiving RMDs by whichever is later, December 31 of the year in which the deceased participant would have turned 72 or December 31 of the year following the year in which the participant died. The amount of these RMDs will be based on the age of the beneficiary participant.
On the other hand, if the participant died on or after their required beginning date, the beneficiary would have to begin receiving RMDs by December 31 of the year the participant died (unless, of course, the participant had already received their RMD prior to their death. In this case, the first year’s RMD would be based on the age of the deceased participant, while subsequent year RMDs would be based on the age of the beneficiary.
What happens when a beneficiary participant dies? The money cannot remain in the Thrift Savings Plan. The payments must be made directly to those who the beneficiary participant designated as his/her beneficiaries. In addition, the money cannot be rolled over into an IRA or other retirement account. This could result in a major tax liability for the beneficiary of a beneficiary participant. Unless there is a strong reason (e.g., the beneficiary participant is under 59 ½), it would be best for the beneficiary participant to combine the beneficiary participant account with their regular account (if they have one), or to roll it over into an IRA.