If the owner of a savings plan account dies, his / her beneficiary will inherit his / her beneficiary. Participants can identify the user on the TSP-3 form (which can be found on the TSP website). If there is no specific beneficiary, the Savings Plan follows the standard order of precedence for federal benefits.
This command is:
• The child or children on an equal footing, with the division of the belonging deceased child equally divided among the descendants of that child;
• Appointed executor or administrator of your property;
• The closest relative who is entitled to your property under the laws of the state in which you were residing at the time of your death.
If your user is a spouse and your balance on your TSP is $ 200 or more, the TSP will set up a participant-user account on their behalf. Non-spouse users are not allowed to keep money in the Savings Plan. The owner of the user’s account will not be able to make contributions, borrow or transfer money to the inherited account. They will be able to withdraw from the account and make interfinancial transfers.
No matter how your TSP account is invested, your spouse’s user account will be invested in an age-appropriate life fund (L). As beneficiary participants are allowed transfers between funds, they are free to reallocate investments based on TSP rules.
In addition to this general information, there is also special information related to the participants’ user accounts.
If your user has their own TSP account, they are allowed to transfer the user participant account to their personal TSP account. But wait; i can’t work the other way around! They cannot credit or transfer an existing TSP account (nor an external IRA or other retirement plan) to the participant beneficiary’s account.
There are other rules that deal with combining regular and user accounts of participants. If there is a Roth balance in any account, the “Roth Launch Date” (this date is used to determine if Roth earnings qualify) would be the earliest Roth TSP launch date, regardless of whether date to regular account or user account.
If you are under 59 ½ at the time you inherit a participant user account, the Roth rules provide another warning when deciding whether to combine it with your regular TSP account. With rare exceptions, withdrawals taken before the age of 59 on regular TSP accounts are subject to a 10% penalty for early withdrawal. Participant accounts do not have such a penalty.
With regard to withdrawals, the rules applicable to regular TSP accounts also apply to the accounts of beneficiary participants. When a withdrawal requires a minimum RMD for distribution), the distribution is based on whether the deceased participant has reached its “required start date”. The required start date is April 1 of the year after the deceased participant would have turned 72 (70 ½ for those born before July 1, 1949).
If the participant died before the desired start date, the beneficiary must start receiving RMDs later, on 31 December of the year in which the deceased participant would have turned 72 or on 31 December of the year following the year in which the participant died. The amount of these RMDs will be based on the age of the beneficiary participants.
On the other hand, if a participant died on or after the desired start date, the beneficiary would have to start receiving RMDs by 31 December of the year when the participant died (unless, of course, the participant had already received his RMD before starting U in this case, the first year of the RMD would be based on the age of the deceased participant, while the RMDs of the following year would be based on the age of the beneficiary.
What happens when a participant user dies? Money cannot stay in the Savings Plan. Payments must be made directly to those designated by the participating beneficiary as their beneficiaries. In addition, money cannot be transferred to an IRA or other pension account. This could result in a large tax liability for the beneficiary participant beneficiary. Unless there is a strong reason (e.g. a participating user has less than 59 ½), it would be best for the participating user to combine the participant user account with their regular account (if any) or transfer it to the IRA.
Everything in this article and more can be found in the useful TSP booklet, Your TSP Account: A Guide for Participant Users https://www.tsp.gov/publications/tspbk33.pdf.
What it takes to become a TSP millionaire in today’s dollars
With a sufficiently long time frame, which includes consistently large contributions and decent long-term stock returns over that period, it is possible to become a millionaire by combining middle- and upper-middle-class incomes, including most jobs in the federal service.