You cannot rely on documents such as a will or a trust to specify who will inherit your TSP monies. Image: William Potter/Shutterstock.com
By: John Grobe, Federal Career ExpertsWho’s your beneficiary? It’s important to have your wishes as to who you want to inherit your Thrift Savings Plan up to date. Every time you have a change that affects your wishes you should immediately update your beneficiary designation. It’s tempting to say, “I’ll get around to it.” and put off the updating to a later, possibly more convenient time. Though we might actually get around to updating our wishes, there’s a chance that this important action may fall through the cracks. It is more common than you think to find ex-spouses inheriting TSP accounts.
You cannot rely on documents such as a will or a trust to specify who will inherit your TSP monies. As with other federal benefits, the Thrift Savings Plan follows the standard order of precedence (sop) in determining who receives your account.
That order is:
1. Designated beneficiary.
2. If none, to your spouse.
3. If none to your children, with the share due any deceased child divided equally among that child’s descendants.
4. If none, to your parents equally or to your surviving parent.
5. If none, to the appointed executor or administrator of your estate.
6. If none, to your next of kin based on the law of intestacy of the state in which you resided at the time of your death.
There are a couple of wrinkles about the words “child” and “parent” as used in the sop. Child means either a biological child or a child adopted by the TSP participant. It does not include stepchildren who have not been adopted, nor does it include biological children who have been adopted by someone other than your spouse. The meaning of parent does not encompass stepparents who have not adopted you.
The TSP no longer uses the form TSP-3 for beneficiary designation. Today, you must designate your beneficiary online in your TSP account, or by using the Thriftline.
There are rules about what your beneficiary is allowed to do with the TSP funds they inherit. If your beneficiary is your spouse, the TSP will establish a “beneficiary participant account” in their name. If your spouse beneficiary is a federal employee/retiree who also has a TSP account, they will be allowed to (and should) roll the beneficiary participant account over into their own account.
If, on the other hand, your beneficiary is not your spouse, they will not be allowed to keep the money in the TSP. The TSP sets up a temporary TSP account for the non-spouse beneficiary and will make a payment either directly to the non-spouse beneficiary, or to an inherited IRA from that temporary account. If a non-spouse beneficiary does not request payment within 90 days, the TSP automatically sends the payment directly to the beneficiary.
There are a couple of issues that might delay payment to beneficiaries (both spouse and non-spouse). Any court orders against the participant’s TSP account must be resolved before payment can be made.
Outstanding loans will have to be foreclosed. There is no provision for repaying outstanding loans. The loan amount will be reported to the IRS as income that is taxable to the participant’s estate.
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