Inheriting TSP from father, how to open inherited IRA?

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fabis
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Inheriting TSP from father, how to open inherited IRA?

Post by fabis »

I am inheriting my father's TSP and I think I am eligble to put the lump sum that I receive in what is called an Inherited IRA and then withdrawal the money over a 10 year period. I believe this would then act as taxable income (on top of my regular salary).I also plan on maximizing my 401k contributions in order to offset the new taxes.

Has anyone gone through this situation? Am I doing this right?

I would rather not hire a CPA if one isn't needed. I just need to understand how to calculate the "witholdings" for tax purposes from the IRA or if i should just hold back 22% (my tax bracket)
rkhusky
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Re: Inheriting TSP from father, how to open inherited IRA?

Post by rkhusky »

DesertDiva
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Re: Inheriting TSP from father, how to open inherited IRA?

Post by DesertDiva »

Condolences on your loss
retiredjg
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Re: Inheriting TSP from father, how to open inherited IRA?

Post by retiredjg »

I think you are understanding things right. What you may not know is that the TSP will not do anything unless you use their forms. You can open an inherited IRA wherever you want. Then you and that new custodian will probably fill out and sign something on the TSP forms. Things get mailed back and forth. And so on.

Much information is available about the TPS from tsp.gov. You can also call them. Good luck. :happy
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fabis
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Re: Inheriting TSP from father, how to open inherited IRA?

Post by fabis »

Thank you for your replies.

2 quick questions: when the TSP funds go into an inherited IRA, do I choose new investments or is it locked into whatever fund it was previously in? How does Vanguard make money off the inherited IRA?
retiredjg
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Re: Inheriting TSP from father, how to open inherited IRA?

Post by retiredjg »

The TSP funds will be sold and the money transferred as cash. Then you buy whatever you want.

I don't know how to answer how Vanguard makes money from the inherited IRA. As I understand it, you will pay the cost of the funds you buy. Vanguard is not in the business of "making money".
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grabiner
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Re: Inheriting TSP from father, how to open inherited IRA?

Post by grabiner »

fabis wrote: Mon Sep 14, 2020 5:46 pm I just need to understand how to calculate the "witholdings" for tax purposes from the IRA or if i should just hold back 22% (my tax bracket)
Withholdings only need to be made when you withdraw from the inherited IRA. The withdrawals will be taxable, so you need to have withholding or estimated tax to pay the tax due. If you withdraw $100K in a single year, that may push you into a higher tax bracket; the amount you would need withheld would be the difference between the tax on $X and $X+100K, where X is your other taxable income. (The withholding can be taken from either your salary or the IRA withdrawal.)

Getting the withholding slightly wrong won't lead to a penalty, although it may lead to a tax bill the next April. As long as your tax withheld for the current year is at least 90% of the tax due, or 100%/110% (depending on income) of last year's tax, there is no penalty.

You may also need to have state taxes withheld if your state has an income tax.
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Re: Inheriting TSP from father, how to open inherited IRA?

Post by grabiner »

retiredjg wrote: Mon Sep 14, 2020 6:31 pm The TSP funds will be sold and the money transferred as cash. Then you buy whatever you want.

I don't know how to answer how Vanguard makes money from the inherited IRA. As I understand it, you will pay the cost of the funds you buy. Vanguard is not in the business of "making money".
But the funds you hold in the inherited IRA will have expenses, which pay Vanguard the cost of management. If a fund has 0.10% expenses, with $100K invested, and the fund holds stocks which rise by 10%, you won't have $110K in the fund at the end of the year; you will have $109,890. The $110 is your share of the fees paid to the fund managers and administrators. (Similarly, the funds your father held in the TSP have expenses, which pay the TSP's administrative costs, and a fee to BlackRock for managing the funds.)
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fabis
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Re: Inheriting TSP from father, how to open inherited IRA?

Post by fabis »

Thanks for the replies
retiredjg
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Re: Inheriting TSP from father, how to open inherited IRA?

Post by retiredjg »

grabiner wrote: Mon Sep 14, 2020 7:57 pm
retiredjg wrote: Mon Sep 14, 2020 6:31 pm The TSP funds will be sold and the money transferred as cash. Then you buy whatever you want.

I don't know how to answer how Vanguard makes money from the inherited IRA. As I understand it, you will pay the cost of the funds you buy. Vanguard is not in the business of "making money".
But the funds you hold in the inherited IRA will have expenses, which pay Vanguard the cost of management. If a fund has 0.10% expenses, with $100K invested, and the fund holds stocks which rise by 10%, you won't have $110K in the fund at the end of the year; you will have $109,890. The $110 is your share of the fees paid to the fund managers and administrators. (Similarly, the funds your father held in the TSP have expenses, which pay the TSP's administrative costs, and a fee to BlackRock for managing the funds.)
Thank you David. On re-reading my post, I see that "cost" could give the wrong impression. I meant the expenses of the fund.
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Re: Inheriting TSP from father, how to open inherited IRA?

Post by retiredjg »

fabis wrote: Mon Sep 14, 2020 5:46 pm I would rather not hire a CPA if one isn't needed. I just need to understand how to calculate the "witholdings" for tax purposes from the IRA or if i should just hold back 22% (my tax bracket)
If you usually owe little tax or have only a small refund, withholding about 22% should be about right. If you usually get a large refund, you could withhold less, but try to stay in the "safe harbor" ranges mentioned by grabiner.

Withholding when you do the RMD is an incredibly easy way to take care of the taxes due.
Buford T Justice
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Re: Inheriting TSP from father, how to open inherited IRA?

Post by Buford T Justice »

Op needs to make sure they are the beneficiary and not a successor beneficiary.
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