Posted on Friday, 23rd June 2023 by

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Recently updated, and at times contradictory TSP guidance concerning this subject, was presented in my previous article. I would like to thank Tammy Flanagan, a former federal employee, professional federal benefits specialist, and friend for contacted me about this issue.

The Beneficiary Conundrum

How assets of TSP accounts are distributed to beneficiaries, upon the owner’s death, is determined by complex tax laws. When an annuitant dies, the TSP establishes a Beneficiary Participant Account (BPA) in the spouse’s name if married and/or sets up a temporary account for all non-spouse beneficiaries. Temporary account holders have 90 days to either withdraw the funds or roll them over into an inherited IRA.

A spouse manages their account, assigns beneficiaries, withdraws funds, sets up an annuity if desired or moves the funds to a private sector IRA.

So far, not bad!

BPA Beneficiaries – A Different Outcome

This is where I screwed up and relied too heavily on disjointed guidance and the TSP Thriftline without digging deeper. My apologies.

The TSP’s Guide for Beneficiary Participants, Death Benefit Guide, and the TSP’s Tax Rules About TSP Payments clarifies how assets are distributed to beneficiaries of a BPA. This plan is set up exclusively for the spouse of a deceased annuitant.

Death Benefit Guide

I found this clarification on page 9 of the TSP Death Benefit Guide in a blue box at the top of the page, “If a beneficiary participant dies, the new beneficiary(ies) cannot continue to maintain the account in the TSP. Also, the death benefit payment cannot be rolled over into any type of IRA or plan.” The only person that can be a beneficiary participant is the spouse of a deceased annuitant.

According to Kim Weaver, Director of External Affairs for the TSP, “…under Code 402(c)(9) and (11), the beneficiary of a spouse is not considered a beneficiary of the employee, which is a requirement for a rollover. Beneficiaries from BPAs are subject to a 10% withholding unless the recipient elects otherwise.

Guide to Beneficiary Participants

This guide clearly states on page 11, “Death benefit payments made from your beneficiary participant account must be paid directly to your beneficiary(ies) These payments are subject to certain tax restrictions and cannot be rolled over to an IRA or eligible employer plan. In addition, your beneficiary(ies) will have to pay the full amount of taxes on the taxable portions of the payment in the year it is received.”

Their Tax Rules About TSP Payments Guide also states this on page 14 under Death Benefits.

The Down Side

The inability of the beneficiaries listed on a BPA, the account of a deceased annuitant’s spouse, to transfer their funds to an inherited IRA can be a game changer for many. This can create a significant tax burden the year of the death for the beneficiaries, especially for those with large accounts.

A spouse with a large inherited BPA may find it prudent to explore moving their TSP to an IRA at another institution. This affords your IRA beneficiaries the ability to roll over their inheritance to an inherited IRA when the spouse dies. Beneficiaries can then take withdrawals over a number of years to reduce their annual tax liability.

I intended to stay with the TSP until I discovered this was still the rule. Now I’m considering rolling over my TSP so my wife won’t have to contend with this when I’m gone. Where am I going!  Hate to think about that but reality is what it is.

As mentioned in the previous article this can also happen to non-spousal beneficiaries of a deceased annuitant. If the beneficiary dies before electing to transfer their temporary account to an inherited IRA, all of the funds must be distributed immediately to the beneficiaries listed in their temporary account. The funds can’t be rolled over to an inherited IRA.

Temporary Account Heads Up

While talking with one of the three TSP customer service reps I called for guidance, one mentioned the following. If you intend to transfer your temporary account to an inherited IRA, initiate the process as soon as possible. It takes time to process and coordinate the transfer.




Recommendation

The retirement process takes considerable time and attention. There are so many variables and you can easily miss something significant along the way.

I highly recommend Tammy Flanagan’s civilian federal employee’s consulting services that she and her staff have consistently provided since 2006. They offer professional pre-retirement consultation and can help you navigate the decisions you will make as you begin your transition to retirement.

Tammy Flanagan and her associates at Retire Federal are all highly experienced federal retirement benefits experts. They are equipped to provide you one-on-one retirement counseling on all of the steps you will take leading to your retirement including; assistance with choosing your best date to retire, computing an estimate of your net income (CSRS or FERS, Social Security, and TSP), helping decide when to claim Social Security, assistance understanding your TSP withdrawal options, determining whether Medicare Part B is necessary and much more.

Conclusion

I revised the previous article on our blog to incorporate this guidance. If you printed a copy for your retirement file, discard it and print the update blog article. All of the newsletter articles are posted on our blog.

You will find, at the end of each printed blog article, a complete list of all web address links that are related to that article. One of our subscribers recommended that we add web addresses for all of the links we publish with each newsletter article. They are all available with the blog article printout.

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Disclaimer: The information provided may not cover all aspect of unique or special circumstances, federal regulations, medical procedures, and benefit information are subject to change. To ensure the accuracy of this information, contact relevant parties for assistance including OPM’s retirement center. Over time, various dynamic economic factors relied upon as a basis for this article may change.

The advice and strategies contained herein may not be suitable for your situation and this service is not affiliated with OPM or any federal entity. You should consult with a financial, medical or human resource professional where appropriate. Neither the publisher or author shall be liable for any loss or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.

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Posted in ANNUITIES / ELIGIBILITY, BENEFITS / INSURANCE, ESTATE PLANNING, FINANCE / TIP, RETIREMENT CONCERNS, SOCIAL SECURITY / MEDICARE | Comments (0)


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