TSP Death Benefits – What Your Beneficiaries Need to Know

Last week, we discussed the importance of ensuring your beneficiary designations are in order. Let’s continue and talk about what beneficiaries need to know and what they need to do.

Trigger warning – this information is detailed and may be difficult to process. Keep a few things in mind as you read:

• It’s good to educate yourself on a surface level – just reading plants a few seeds.
• Consider passing this information along to your future beneficiaries.
• You can always seek help from your agency, the TSP, or a tax professional for additional information.
• You can refer back to this article as needed (remember, it’s 2024, and rules can change).
• We promise not to quiz you at the end! 😊

Let’s dive in…

Reporting a Death to the TSP

The beneficiary (or someone acting on their behalf) is generally responsible for reporting the death of a TSP participant to the TSP. The TSP does not automatically know when a participant has passed away. This can be done by:

1. Calling the ThriftLine at 1-877-968-3778
2. Submitting the required forms and death certificate

If the participant was a current federal employee, their employing agency may notify the TSP of the death. However, beneficiaries shouldn’t rely solely on this and should take action themselves.

To report a death you will need:

• Full legal name of the deceased
• Date of death
• Date of birth
• Mailing address
• Last four digits of the participant’s Social Security number (not required, but helpful)
• Marital status at the time of death (If married, provide the surviving spouse’s name)
• The death certificate (must include an official seal, date of death, and cause of death)

Once the TSP is informed of the participant’s death, they will review the account and beneficiary designations. The TSP will then reach out to the designated beneficiaries with information on how to claim the death benefits.

Distribution Options for Beneficiaries

Beneficiaries can choose between a single payment or monthly payments. Note that distributions may be subject to federal income tax. Different rules may apply depending on the relationship (i.e., spouse vs. non-spouse beneficiaries).

Spouse as a Beneficiary and BPA Accounts

If a spouse is a beneficiary, TSP will establish a beneficiary participant account (BPA) in the spouse’s name. The money will be handled in the BPA as follows:

• It will be invested just as it was in the deceased participant’s account for the TSP Funds.
• Money from the mutual fund window will be reinvested in TSP funds according to the deceased participant’s investment election on file.
• If the spouse’s share is less than $200, they can request payment within 90 days.

Spouse beneficiaries have more options:

• Option 1: Maintain the BPA – This has the same TSP distribution options as separated TSP participants and is not subject to the 10% IRS early withdrawal penalty. If the TSP was Traditional, the spouse will have tax-deferred growth. If it was a Roth, tax-free growth of earnings applies when earnings are qualified (5 years since initial contribution, age 59½, permanently disabled, or deceased).
• Option 2: Take Distributions – Spouse beneficiaries have several options for TSP distributions:
  • Lump Sum Distribution: You can take all or a portion of the account balance. The minimum amount for a lump sum distribution is $1,000. This option is allowed even if you’re currently receiving installment payments.
  • Installment Payments: You can choose to receive payments in installments based on either a dollar amount or life expectancy. Installments can be received monthly, quarterly, or annually.
  • Life Annuity (MetLife): You can convert all or a portion of the account balance into a life annuity. The minimum amount required for a life annuity is $3,500. Once purchased, the life annuity cannot be revoked or changed.
• Option 3: Combine TSP Accounts – Spouse beneficiaries who also have a TSP account can combine their Beneficiary Participant Account (BPA) into their TSP participant account. Important considerations:
  • The combined amount will not count toward the annual elective deferral limit.
  • It will be subject to the rules applied to the TSP participant account.
  • Once the Roth balance is moved from the BPA to the TSP participant account, the qualification rule of “at least age 59½, permanently disabled, or deceased” will apply for the Roth earnings to be qualified.
  • The earlier Roth Initiation Date applies to the combined Roth balance.
  • If combining a BPA resulting from a uniformed services account with a civilian TSP account, tax-exempt contributions in the traditional balance will not be transferred over; TSP will distribute them directly to the spouse beneficiary.
  • Important: Once you combine the accounts, the TSP account follows your rules – so you will have the 10% early withdrawal penalty until you are 59½, etc. In other words, once you combine it, it becomes a regular TSP account.
• Option 4: Rollover to Another Employer-Sponsored Plan/401(k)
• Option 5: Rollover to Individual Retirement Account (IRA & Roth IRA)

Taxes and RMDs for Spouse Beneficiaries

So what happens with each of these options – are there taxes or penalties? Let’s review and recap.

• IRS Early Withdrawal Penalty: Only the ‘maintain BPA’ option allows the beneficiary to withdraw before age 59½ without penalty. For all other options, you will have to wait until after age 59½ (although exceptions may apply).
• Required Minimum Distributions (RMDs):
  • Maintain BPA: The entire BPA account balance, including both traditional and Roth, is subject to RMDs.
  • Combine TSP accounts: RMDs will be required beginning on a date based on when the TSP participant turns age 73 or retires, whichever is later.
  • Rollover to an employer-sponsored plan/401(k): RMDs will be required beginning on a date based on when the plan participant turns age 73 or retires, whichever is later.
  • Rollover to IRA and Roth IRA:
    • Traditional IRA: RMDs are required beginning on the date based on when the plan participant turns age 73.
    • Roth IRA: No RMD requirement.

You thought we were done…AS IF! ☹ Hang in there, we are almost at the end.

We have to talk about non spouse beneficiaries…they have two options: Lump sum or Roll the money into an inherited IRA outside of TSP.

The taxable portion of payments to beneficiaries are subject to 20% tax withholding. Payments transferred to an Inherited IRA account are not subject to withholding.

A few miscellaneous items to also note before we conclude:

• Death benefit payments are distributed proportionally from both traditional (non-Roth) and Roth balances in your account.
• Any non-vested Agency/Service Automatic (1%) Contributions will immediately become vested.
• If you pass away with an outstanding TSP loan or loans, death benefit payments cannot be made until the loan is classified as a foreclosure. The loan amount will be considered taxable income for your estate, not for your beneficiaries. Your estate or survivors are not allowed to repay the loan.
• In the event of a court order against your TSP account at the time of your death, the court order must be resolved before any death benefit payments can be issued to your beneficiaries.
• If you die after submitting a loan, withdrawal, or distribution request, the request will not be processed if your death is known before the payment is issued. If the payment has already been processed, it will remain as is, and the funds cannot be returned.

Remember – it is always best to check TSP websites resources – they provide updated booklets on death benefits which can come in handy – and make sure to follow their process as often there are obsolete forms floating around on various other websites. Make sure to share with your future beneficiaries as part of your getting organized in your estate planning process.