Posted on Saturday, 4th July 2015 by

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Updated 6/22/2023

When a spouse is designated the beneficiary of a Thrift Savings Plan (TSP) account, the TSP establishes a beneficiary participant account in the spouse’s name. The money in the beneficiary participant account stays invested as it was in the deceased participant’s account except for any money the participant had invested in the mutual fund window.

Money from the mutual fund window will be reinvested in TSP funds according to the deceased participant’s investment election on file. The money in a beneficiary participant account is not subject to federal income tax withholding until it is withdrawn. No taxes would be due unless you withdraw funds or are required by age to take a minimum distribution.


The TSP’s Death Benefits brochure states  that, “A beneficiary who is not a surviving spouse cannot retain a TSP account. The death benefit payment will be made directly to the beneficiary or to an ‘inheritedIRA.” There are distinct benefits for non-spousal beneficiaries to have their inheritance transferred to an inherited IRA. When a death benefit is paid directly to a beneficiary they may be subject to a 20% mandatory federal income tax withholding and the entire amount will be taxable in the year it was inherited. This may create a significant tax burden, depending on the account balance, that can be deferred if the funds are transferred to an inherited IRA with a financial institution such as a brokerage house, financial planning firm, or mutual fund family.

The Surviving Spouse

In my article titled Survivor’s Beware – The TSP Trap I discuss what a surviving spouse needs to consider before moving their funds to a private equity firm, precautions they should take, the advantages of the Thrift Savings Plan, the ease of managing their TSP account, and recommendations to safeguard their TSP assets with little to no market risk.

These same considerations should be evaluated by retirees and those approaching retirement who are often approached by financial planners with recommendations to move their funds from the TSP to higher market risk investments. There are also some disadvantages to consider for inherited spousal TSP account holders that could negatively impact their heirs.

I kept my TSP account in retirement because of the many TSP advantages that I discuss in the above mentioned article and in The TSP Advantage (Should I Stay or Go). I like the simplicity of the TSP, low management fees, and the fact that the G-Fund has NO MARKET RISK and its one year return is 3.74 percent and 4.66% since inception as of 6/7/2023. The L-Income Fund, that has approximately 30% allocated to equity and non-government bond investements, its return is 3.92% for the last year and 4.05% since its inception. However, there are good reasons to move our funds to an IRA for the benefit of our beneficiaries longterm.

Beneficairy Accounts

According to the TSP, “If a beneficiary participant dies, the new beneficiary(ies) cannot continue to maintain the account in the TSP.”  If the surviving spouse’s beneficiaries neglect to transfer the temporary account the TSP sets up for them within 90 days or they die before distirbuting the inheritance, all of the funds are distributed that year to the beneficiaires of the temporary account and the heirs must claim the full amount as income the year that the survivor beneficiary dies.

TSP accounts, especially for FERS annuitants, can be hundreds of thousands of dollars and some exceed a million or more. Because your beneficiaries would have to claim all of that income the year it is inherited if they don’t elect to roll over the account to an inherited IRA at another financial institution, they could end up in the top tax bracket. If they transfered the funds to an inherited IRA account they can spread out or defer payments for years.

Transfering Accounts to an IRA

Anuitants and spouses of a deceased annuitants that have a Beneficiary Participant Account (BPA) can transfer (roll over) their TSP account to an IRA with either a financial planner, brokerage house, or mutual fund family. If you transfer to an IRA account, your heirs can, if desired, transfer their share to an inherited IRA at that institution or another and won’t have to claim the entire amount the year of the inheritance. Non-spousal beneficairies of an annuitant’s TSP acounts must elect a transter to an inheristed IRA within 90 days or they will receive the lump sum distribution that will be taxable the year of the death.

Unfortuntely, beneficiaries of a BPA, the spousal account of a deceased annuitant, can’t transfer their inherited funds to an inherited IRA, their only option is to take a lump sum the year the funds are paid out.

TSP Alternatives

You can closely match TSP funds to private sector indexed funds with companies like Fidelity and Vanguard mutual funds or exchange traded funds (ETFs). Indexed funds generally have very low management fees, far less than managed funds charge and ETFs mirror the performance of many indexed mutual funds and they are traded like stocks. These two companies are the giants of the mutual fund industry and will assist you with the transfer and recommend funds that closely match the TSP fund options with some exceptions.

Most mutual fund families and brokerage houses can establish inherited IRAs for their clients however you need to be aware of front and back end loads (fees) that some mutual funds charge that can be as high as 5% or more. I don’t believe there are any mutual funds that can guarantee that your investment will never decrease in value like the TSP G-Fund does. However, there are many government bond fund options to choose from.

You don’t have to invest in stocks or mutual funds. You can invest your funds in Certificates of Deposit, maintain a cash account, buy municipal bonds, U.S. Treasury bills, notes or bonds, corporate bonds of all types, or any other investment that you choose in an IRA.

I left instructions with our estate plan advising my wife and successor trustees about the beneficiary time line to transfer to an inherited IRA. I may reconsider transferring my TSP account to an IRA to simplify things down the road.

My next article will discuss inherited IRAs and how they are established and function and a final article in this series will discuss indexed mutual fund alternatives to the various TSP funds.

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The information provided may not cover all aspect of unique or special circumstances, federal regulations, medical procedures, and financial information are subject to change. To ensure the accuracy of this information, contact relevant parties and ask them to review your official personnel file and circumstances concerning this issue. Retirees can contact the OPM retirement center. Our article is not intended nor should it be considered investment advice and our articles and replies are time sensitive. 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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