2012 Federal Employees Almanac
Chapter 6, Section 6: Death Benefits
- By Almanac Staff
- February 19, 2012
You may designate one or more beneficiaries to receive your TSP account in the event of your death. A beneficiary can be any person, corporation, trust, or legal entity (including a foundation or charity), or your estate. You may choose one or more beneficiaries without regard to the standard order of precedence described below, and may designate one or more contingent beneficiaries in case the first beneficiary(ies) dies before you do.
To name a beneficiary or beneficiaries for your account, mail Form TSP-3, Designation of Beneficiary, to the TSP Service Office; your form must be received by the TSP Service Office before your death. A will, prenuptial agreement, separation agreement, property settlement agreement, or court order is not valid for the disposition of your TSP account. If no designation of beneficiary form has been submitted, the standard order of precedence will apply.
If you do not designate one or more beneficiaries for your account, it will be distributed according to the standard order of precedence.
Distributions and Order of Precedence
If there was a court order against the participant's TSP account when he or she died, the court order must be resolved before any death benefit payments can be made to beneficiaries. If the participant had a TSP loan outstanding at the time of his or her death, no payment will be made to any beneficiary until the outstanding loan has been declared a taxable distribution and closed.
The share of any designated beneficiary who dies before you die will be distributed proportionally among the surviving designated TSP beneficiaries. Your Designation of Beneficiary form will be void if none of the designated beneficiaries is alive at the time of your death. In that case, the standard order of precedence will be followed.
The standard order of precedence if you do not designate a beneficiary is as follows: your widow or widower; if none, to your child or children equally, and descendants of deceased children by representation; if none, to your parents equally or the surviving parent; if none, to the appointed executor or administrator of your estate; if none, to your next of kin who is entitled to your estate under the laws of the state in which you resided at the time of your death.
If there are any changes in your family status (marriage, divorce, birth, death, etc.), you may want to make changes in your beneficiary designation. To change or cancel a previous designation, mail a new Form TSP-3 to the TSP Service Office.
For your beneficiaries to receive your account, Form TSP-17, Information Related to Deceased Participant, must be submitted to the TSP Service Office together with a certified copy of your death certificate.
P.L. 111-31 of 2009 allows surviving spouse beneficiaries to keep TSP accounts open as "beneficiary participant accounts" and manage them much as the original account holder could, rather than being compelled to take a distribution as under prior policy. Spouse beneficiaries cannot add new money to the accounts or borrow against them. However, they have the same tax treatment and the same investment, interfund transfer, beneficiary designation, and withdrawal options as other account holders, while subject to the same required minimum distributions.
A spouse beneficiary can transfer the proceeds of a beneficiary account into an existing TSP account that is in his or her name by completing Form TSP-90, Withdrawal Request for Beneficiary Participants. A transfer in the other direction is not allowed.
Spouse beneficiaries also may take distributions rather than have spouse beneficiary accounts, although they are no longer required to do so. A payment made directly to the spouse of a deceased participant is subject to 20 percent mandatory federal income tax withholding. A spouse beneficiary can avoid the mandatory withholding on all or part of these payments by having the TSP transfer all or part of the deceased participant's account directly to a traditional individual retirement account or to an eligible employer plan (including the beneficiary's own TSP account if applicable, as long as the beneficiary is not receiving monthly payments from that account).
Some spouse beneficiaries also are eligible to transfer the money directly into Roth IRAs, which accept after-tax dollars but provide tax-free growth. Consult a tax adviser about potential tax obligations and other considerations of this option.
Death benefit payments made from a beneficiary account must be paid directly to the surviving spouse's own beneficiary or beneficiariesies). These payments are subject to certain tax restrictions and cannot be transferred or rolled over into an IRA or eligible employer plan. The payment will be fully taxable in the year the beneficiary or beneficiaries receive it.
Non-spouse beneficiaries must take a distribution. These payments are subject to 20 percent federal income tax withholding. However, a beneficiary who is not a surviving spouse can avoid this withholding by requesting that the TSP transfer all or part of the death benefit payment directly to an "inherited" IRA. An inherited IRA is an IRA established specifically for the purpose of transferring money inherited from a plan such as the TSP. Inherited IRAs may provide significant tax benefits because the required distributions from the IRA generally can be spread across the lifetime of the beneficiary. The rules are complicated, and there are restrictions. Check with your tax adviser and IRA provider.
Learn more about the TSP in 1105 Media Inc.'s book Your Thrift Savings Plan. Please call (800) 989-3363 for ordering information.