Kim Weaver, director of external affairs for the Federal Retirement Thrift Investment Board, this what she told us:
"However, there is a very important tax planning issue to keep in mind about a beneficiary participant account. When the beneficiary spouse dies, his/her beneficiaries may not transfer or roll over the money to an IRA. The money left in the account must be paid to the successor beneficiary(ies) as a single payment and may not be transferred or rolled over to an IRA. This could create a tax burden on the beneficiaries of the spousal account. (This is not a TSP rule, but an outcome required by the Internal Revenue Code.)
"If the beneficiary spouse, however, rolls the money out of the TSP into an IRA at some point, then when the inheriting spouse dies, his/her beneficiaries can roll the money into an IRA (including inherited IRAs which allow delays of the tax on the money).
"So, this tax issue is not a reason for a participant to roll his or her money out of the TSP, but it is something that a spousal beneficiary should think about carefully. I hope this is clear — there are a lot of moving parts in this one."