TSP Beneficiary Rules: How to Keep Your Heirs From a Lump-Sum Tax Bill
Last reviewed: September 2026 · Educational, not individual advice
Only a spouse can keep an inherited TSP inside the plan, as a beneficiary participant. When that spouse dies, the TSP pays the children a lump sum that cannot be rolled into an inherited IRA and is taxed in one year. The fix is simple: the surviving spouse rolls the TSP to an IRA and names the children.
For federal employees the TSP is excellent: low costs, solid funds, and simple choices during a career. Its beneficiary rules are less forgiving than an IRA's, and the difference shows up at the worst time. This guide covers who gets your TSP, what a surviving spouse can do, the three-generation trap, the non-spouse deadlines, and the Maryland tax layer. We use a hypothetical composite household, Sam and Dan, to keep the numbers concrete; they are not clients.
Who gets your TSP when you die?
Your TSP goes to whoever you named in your beneficiary designation, which you make and update online in My Account (the old paper Form TSP-3 is no longer used). The designation controls, not your will. Two consequences:
- A divorce does not revoke it. A former spouse still named on the TSP receives the money.
- If you never named anyone, the TSP follows a fixed order of precedence: your spouse; then your children in equal shares (a deceased child's share to that child's descendants); then your parents; then the executor of your estate; then your next of kin under state law.
Most federal couples name each other as primary and the children as contingent. That is usually right, and it is where the trap begins.
What can a surviving spouse do with an inherited TSP?
A spouse who inherits a TSP has three choices, and the default is the one with the hidden cost.
| Option | How it works | Best for | Watch out |
|---|---|---|---|
| Keep it in the TSP as a beneficiary participant | The TSP opens a beneficiary participant account in the spouse's name; same funds, same low costs | A spouse who values the TSP's simplicity for their own lifetime | No second-generation beneficiary participant; the next heirs get a taxable lump sum |
| Roll it to the spouse's own IRA | Direct transfer; the money is treated as the spouse's own; beneficiaries are named on the IRA | Most spouses over 59½, and anyone with children or grandchildren as eventual heirs | Withdrawals before 59½ face the 10% penalty; RMDs follow the spouse's own age |
| Roll it to an inherited IRA | Direct transfer to an inherited (beneficiary) IRA | A younger spouse who needs access before 59½ without the 10% penalty | Different RMD rules; can be converted to the spouse's own IRA later |
The trap: when a beneficiary participant dies
Here is the rule in the TSP's own words: "If a beneficiary participant dies, the new beneficiary(ies) cannot continue to maintain the account in the TSP. Also, the death benefit payment cannot be rolled over into any type of IRA or plan."
Illustrative example. Sam has a $1 million traditional TSP and names Dan as primary and their two children as contingent. Sam dies first. Dan becomes a beneficiary participant and, liking the TSP, leaves the money there. Years later Dan dies. The children are now the beneficiaries of a beneficiary participant account, so the TSP pays them the balance directly. They cannot move it to an inherited IRA and stretch the tax over ten years. The full $1 million, plus growth, is ordinary income to them in one year, federal and state, at the top brackets.
The fix costs nothing. Once Dan becomes the beneficiary participant, he rolls the balance to his own IRA and names the children on the IRA. When Dan dies, each child transfers their share to an inherited IRA and spreads the withdrawals over ten years, which for two working adults in Maryland is the difference between paying tax at 37% plus state on everything at once and spreading it across brackets and years. Nothing is lost by rolling out except the TSP's fund lineup, which an IRA can replicate.
Non-spouse beneficiaries: 90 days and the 10-year rule
A child, sibling, or friend who inherits a TSP directly from the participant (not from a beneficiary participant) has better options, but a short clock.
- The TSP sets up a temporary account and the beneficiary has 90 days to request payment. On day 90 the TSP pays it out automatically.
- The beneficiary can direct the TSP to transfer the money to an inherited IRA (traditional to a traditional inherited IRA, Roth to a Roth inherited IRA). The transfer must be trustee to trustee; a check made out to the beneficiary does not qualify.
- A payment taken instead of transferred is taxable that year, with 20% mandatory federal withholding.
- Under the SECURE Act 10-year rule, most non-spouse beneficiaries must empty the inherited IRA by the end of the tenth year after death. If the participant had already reached required minimum distribution age, the beneficiary must also take annual distributions in years one through nine under the IRS regulations finalized in 2024.
- Roth TSP balances follow the same 10-year rule but come out tax-free, which is why the traditional-versus-Roth question for heirs belongs in the conversation about TSP Roth in-plan conversions.
Naming a trust or your estate as beneficiary is possible but changes the distribution rules and often forces faster payouts; do that only with an estate attorney who has seen the TSP's requirements.
Does Maryland tax an inherited TSP?
Three layers, and only one of them usually bites.
- Income tax. Whoever withdraws traditional TSP or inherited IRA money pays ordinary income tax, federal plus Maryland state and county. Maryland's pension exclusion for taxpayers 65 and older does not cover TSP or IRA withdrawals; our guide to how every state taxes retirement income has the detail.
- Maryland inheritance tax. Exempt for a spouse, children, grandchildren, parents, and siblings. Other heirs, such as a niece or a friend, pay 10% of what they receive.
- Maryland estate tax. Maryland taxes estates above $5 million, an exemption that is not indexed for inflation, while the federal exemption is $15 million in 2026. A federal couple with a paid-off Montgomery County home, two TSPs, and a brokerage account can cross $5 million without feeling wealthy. The exemption is portable between spouses only if the first spouse's estate files a Maryland estate tax return and elects portability within nine months.
Five things to do this month
- Log in to My Account and confirm your TSP beneficiaries; update after any marriage, divorce, birth, or death.
- Write down, for your spouse, the instruction: "Roll the TSP to an IRA and name the children." Most surviving spouses never hear it.
- Tell each contingent beneficiary about the 90-day window so nobody takes a check by default.
- Decide what you want your children to inherit, traditional or Roth, and size conversions in your low-income years accordingly.
- If your household's assets are near $5 million, ask an estate attorney about Maryland estate tax and the portability election.
This is one of the five biggest federal retirement mistakes in a different form: treating a benefit decision as paperwork instead of planning. If you want your beneficiary designations, TSP, and estate plan reviewed together, book a call. More guides are on our hub for federal employees, starting with how much you need to retire.
FAQ: inherited TSP accounts
Can my spouse keep my TSP after I die?
Yes. A surviving spouse can keep the money in the TSP as a beneficiary participant, with the same funds and costs. But that account cannot pass to a second generation inside the TSP, so a spouse with children as eventual heirs is usually better off rolling the balance to an IRA and naming the children there.
What happens when a beneficiary participant dies?
The TSP pays the beneficiary participant's heirs directly. Under TSP rules the new beneficiaries cannot keep the account in the TSP, and the death benefit payment cannot be rolled over into any IRA or plan. A traditional balance is therefore fully taxable to the heirs in the year it is paid.
Can a non-spouse beneficiary roll a TSP into an inherited IRA?
Yes, if they inherited directly from the participant. Within 90 days they can direct the TSP to transfer the balance, trustee to trustee, into an inherited IRA and then follow the 10-year rule. A payment taken as a check is taxable immediately with 20% federal withholding and cannot be rolled over.
Who gets my TSP if I never named a beneficiary?
The TSP's order of precedence applies: your spouse; then your children equally, with a deceased child's share going to that child's descendants; then your parents; then your estate's executor; then next of kin under state law. Your will does not override this, and a former spouse still named on the account would be paid.
Does Maryland tax an inherited TSP?
Withdrawals are ordinary income for Maryland and county tax, and the pension exclusion does not apply. Maryland's inheritance tax exempts spouses, children, grandchildren, parents, and siblings but charges 10% for other heirs. Estates above $5 million owe Maryland estate tax even though the federal exemption is $15 million in 2026.
Sources
- TSP, Beneficiary distributions
- TSP, Your TSP Account: A Guide for Beneficiary Participants
- TSP, Designating beneficiaries and order of precedence
- IRS Publication 590-B, Distributions from IRAs (inherited IRAs and the 10-year rule)
- Maryland Comptroller, estate and inheritance tax
This material is for informational purposes only and does not constitute tax, legal, or investment advice. Sam and Dan are a hypothetical composite household, not clients. Beneficiary designations, trusts, and estate tax elections should be reviewed with an estate attorney and tax professional who know your situation.
Securities and investment advisory services offered through LPL Enterprise (LPLE), a Registered Investment Advisor, Member FINRA/SIPC, and an affiliate of LPL Financial. LPLE and LPL Financial are not affiliated with Allset Wealth.