TSP Estate Planning Considerations — and How to Potentially Avoid HUGE Tax Bills
For government employees, the TSP is great: low costs and solid fund selections, especially for those in the growth stage of their careers.
When you name beneficiaries, your spouse is usually the primary, and your child is the secondary.
When you pass away, your spouse becomes a TSP Beneficiary Participant(only the spouse can do that and keep the money at the TSP as his own account).
Now, be careful! If your spouse chooses to leave the money in the TSP, there is no “second generation” TSP Beneficiary Participant.
The account must be paid out as a lump sum to your named beneficiaries — and that can trigger a huge tax bill.
Example:
Husband, wife, and child.
The husband has a $1 million pre-tax TSP. He passes away. His wife is listed as the beneficiary and becomes the Beneficiary Participant. She decides to keep the funds inside the TSP, rather than rolling them into her own IRA.
Later, the wife passes away.
Now, the child inherits the account — but can’t roll it into an inherited IRA. Instead, they’re forced to take the entire $1 million as a taxable distribution that year.
That’s a massive tax hit in one year — and something that can be avoided with the right planning. For example, when wife becomes the beneficiary participant, she can roll it to an IRA and list the child as the primary beneficiary
This material is for informational purposes only and does not constitute tax, legal, or investment advice.