What if a relative died and left you a significant sum as an inheritance? Can you contribute this money in your Thrift Savings Plan account? No, but it’s still part of your overall retirement planning picture and there are several angles to consider.

All TSP contributions must come either from payroll deduction or from rollovers from qualified plans. A qualified plan would be a prior employer’s 401(k), either traditional or Roth, or pre-tax money in a traditional IRA. Aunt Bertha’s bequest is neither coming from your payroll, nor is the inheritance considered to be a qualified plan. However, you can use the inheritance for your future retirement in different ways. Consider the following:

If you’re not contributing the maximum allowed to the TSP, you can increase your payroll deductions so that you reach the maximum at the end of the year and use some of Aunt Bertha’s inheritance to fill in the hole you created in your budget when you increased those TSP contributions. In 2019, the elective deferral amount is $19,000 and those 50 and over (including those that turn 50 during the year) can contribute an additional $6,000 as a catch-up contribution. If your spouse has a qualified plan through their employer, they could do the same thing.

If you are fully funding the TSP, you can contribute to an Individual Retirement Arrangement (IRA) as long as you have earned income. You could set up an IRA for your spouse as long as one of you has earned income. $6,000 is the maximum IRA contribution with a catch-up contribution (same age rules as above) of $1,000. Be sure to check IRS Publication 590-A before you contribute to an IRA, as there are income limits that restrict your ability to contribute to a Roth IRA, or to deduct your contributions to a traditional IRA.

If you’re fully funding both your TSP and an IRA – good for you! You can take Aunt Bertha’s inheritance and invest it in a taxable account. With a taxable account you do not receive a tax break (such as deducting your contributions or getting tax-free or tax deferred earnings), but you will have no restrictions on taking your money out. Neither will you have to pay penalties if you take your money out too early or too late. You’re paying some of your taxes annually as you go (e.g., interest or dividends), or when a taxable event occurs (e.g., capital gains received from the sale of a security). Some of the taxes you pay in a taxable account (the aforementioned dividends and capital gains) may be taxable at a lower rate than the taxes on money withdrawn from a retirement account.