Picking A Beneficiary for Your TSP Isn’t Always Easy

Who You Choose as Your Beneficiary for Your TSP Account Can Be Very Impactful

One of the more important decisions federal workers make in relation to their benefits is determining a beneficiary for their Thrift Savings Plan (TSP) account. If the employee themselves doesn’t inform TSP, the money, upon death, would go to the participant’s spouse, then kids, then parents, then executor of estate, and last to the ‘next of kin.’ Informing TSP of your intended beneficiary can entail one unwanted consequence, and that’s if you previously named one who is now an ex-spouse. In most cases, though, you’ll want to decide the beneficiary of your retirement savings. If it is a spouse, he or she can decide to take a lump sum that may be subject to 20% mandatory federal income tax withholding, roll the money into an IRA or eligible employer plan, or leave it invested with the Thrift Savings Plan upon becoming a widow or widower. If the money is kept with the TSP, it does not remain in the same fund allocation that the original participant had chosen but rather is automatically invested in a Lifecycle fund that corresponds with the beneficiary’s assumed retirement age. The spouse can change the investment choices as they see fit, however. If this person passes away without extracting the money, whoever their beneficiary is must receive a lump sum that is subject to taxation.

When it comes to an original participant’s non-spousal beneficiary, there are only two choices because they are not allowed to open a TSP account like a widow or widower would be able to. Instead, they can either take a lump sum which may be subject to 20% mandatory federal income tax withholding or transfer it into an inherited IRA, which can be a complicated vehicle for retirement savings so it is recommended that whoever is receiving this inheritance should consult with a tax professional or a provider of such retirement accounts. Another thing to discuss with such professionals, for the still-living federal employee at least, is whether it makes sense to transfer out of the TSP upon retirement. With the impacts of the TSP Modernization Act about to reverberate through the federal community, deliberating about whether or not to withdraw from these retirement funds won’t be as loaded or dire of a discussion as it used to be. At the end of the day, the one question a federal employee should be asking themselves is: ‘Do I want my kids to inherit an abundant chunk of my life savings or not?’ A financial planner should be able to help you delve into the thick of questions like these.

Until Next Time,

**Written by Benjamin Derge, Administrative Associate. The information has been obtained from sources considered reliable but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Benjamin Derge and not necessarily those of RJFS or Raymond James. Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize, or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website’s users and/or members. Securities offered through Raymond James Financial Services, Inc., Member FINRA/SIPC. Investment advisory services offered through Raymond James Financial Services Advisors, Inc. Serving Those Who Serve is not a registered broker/dealer and is independent of Raymond James Financial Services. This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.

Beneficiary for your TSP – TSP Beneficiary