TSP - Surviving spouse should probably move out of the TSP

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fundseeker
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TSP - Surviving spouse should probably move out of the TSP

Post by fundseeker » Sat Sep 24, 2016 9:09 am

I just became aware of this issue, so I thought others might want to know.

If your surviving spouse keeps your TSP money in the TSP after you pass away, the balance left after he/she dies MUST be paid in one lump sum to her beneficiaries, meaning your children, and they will have to pay a large portion of your inheritance to the IRS. They will NOT be allowed to set up an Inherited IRA and enjoy the money over their lifetime and gradually pay taxes.

Here is just one source of this information:
http://www.govexec.com/pay-benefits/ret ... are/63611/

CAVEAT: You should do your own research and/or consult your own legal and tax advisor(s) to determine if this is accurate and to decide what is best for you.

OutInThirteen
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Re: TSP - Surviving spouse should probably move out of the TSP

Post by OutInThirteen » Sat Sep 24, 2016 9:19 am

This is so important that, as soon as I learned of this restriction, I immediately informed my spouse and left specific instructions in my "Important Information" file to roll the survivor beneficiary account over to a Fidelity IRA.

Ricola
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Re: TSP - Surviving spouse should probably move out of the TSP

Post by Ricola » Sat Sep 24, 2016 1:00 pm

Good Find! If you are not going to use the annuity payout method probably better to do a rollover IRA with another institution.

delamer
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Re: TSP - Surviving spouse should probably move out of the TSP

Post by delamer » Sat Sep 24, 2016 3:19 pm

Thnks very much, fundseeker. I printed the article and discussed the implications if he survives me with my husband.

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The529guy
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Re: TSP - Surviving spouse should probably move out of the TSP

Post by The529guy » Sat Sep 24, 2016 3:27 pm

This rule should be linked/documented in the TSP wiki page.

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LadyGeek
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Re: TSP - Surviving spouse should probably move out of the TSP

Post by LadyGeek » Sat Sep 24, 2016 3:48 pm

^^^Thanks. The article is from 2013. To be sure, I went to the source.

- Your TSP Account, A Guide for Beneficiary Participants (9/2015) (page 18 in PDF reader)
- Thrift Savings Plan Death Benefits (August 6, 2014)
- Important Tax Information About Thrift Savings Plan Death Benefit Payments, TSP-583 (10/2015)

I believe this is already in the wiki: TSP estate planning (Successor beneficiaries of direct beneficiary)

Perhaps this section should be highlighted in other wiki pages? Relevant pages are at the bottom of the article under "Thrift Savings Plan (TSP)" navigation menu.
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dm200
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Re: TSP - Surviving spouse should probably move out of the TSP

Post by dm200 » Sat Sep 24, 2016 3:57 pm

Another factor to consider is "asset protection", IMO. I am quite sure that employer retirement accounts have (or may have) greater protection from creditors than IRAs.

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Re: TSP - Surviving spouse should probably move out of the TSP

Post by clydewolf » Sat Sep 24, 2016 5:09 pm

Some more information on the protection of your IRA:
- From the WSJ: http://www.wsj.com/articles/SB124181801239401917
- From a Supreme Court Ruling, you can link to the case: https://www.trustetc.com/resources/educ ... urt-ruling
- State by State analysis of IRA protection as of December 2013: http://www.thetaxadviser.com/content/da ... achart.pdf

Note that the IRS and other government organizations can seize your IRA or 401k.

JosephineP
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Re: TSP - Surviving spouse should probably move out of the TSP

Post by JosephineP » Sun Sep 25, 2016 9:06 am

Thank you for posting this information. I'd like some thoughts on what, if any action, a young-ish widow (mid-40s) should do with a TSP that represents about 3-5% of my total retirement assets. It was my husband's TSP and I assumed it when he died over two years ago.

My feeling was that I should keep the TSP (and not roll it into an existing IRA) and for me, I think it makes sense to put it all in the G Fund, as I have more aggressive allocations in other tax-advantaged retirement accounts. For reference, I have two young children who have no income other than Social Security survivors benefits.

I think if I knew I had a terminal disease or that death was coming sooner rather than later, I might be more inclined to move this money out of the TSP and roll it to an IRA, but assuming I'm on the road to a normal retirement path (I plan to retire in 20 years), I'm not sure it makes sense for me, in my particular circumstance, to move that money out of the TSP before I turn 65 (or whatever retirement age I decide on), just because my kids would have to take this as a lump sum and have to pay taxes on it.

I appreciate any thoughts this group may have.

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Re: TSP - Surviving spouse should probably move out of the TSP

Post by cherijoh » Sun Sep 25, 2016 9:27 am

JosephineP wrote:Thank you for posting this information. I'd like some thoughts on what, if any action, a young-ish widow (mid-40s) should do with a TSP that represents about 3-5% of my total retirement assets. It was my husband's TSP and I assumed it when he died over two years ago.

My feeling was that I should keep the TSP (and not roll it into an existing IRA) and for me, I think it makes sense to put it all in the G Fund, as I have more aggressive allocations in other tax-advantaged retirement accounts. For reference, I have two young children who have no income other than Social Security survivors benefits.

I think if I knew I had a terminal disease or that death was coming sooner rather than later, I might be more inclined to move this money out of the TSP and roll it to an IRA, but assuming I'm on the road to a normal retirement path (I plan to retire in 20 years), I'm not sure it makes sense for me, in my particular circumstance, to move that money out of the TSP before I turn 65 (or whatever retirement age I decide on), just because my kids would have to take this as a lump sum and have to pay taxes on it.

I appreciate any thoughts this group may have.

Jo
Not to be morbid, but many people die unexpectedly without prior warning. I would not want to rely on the idea that I had time to change it in the future. I am not a lawyer, but I hope you have set up an estate plan to protect your children. You don't want the state to make those decisions for you.

2cents2
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Re: TSP - Surviving spouse should probably move out of the TSP

Post by 2cents2 » Sun Sep 25, 2016 10:12 am

Jo,
I'm so sorry for your loss. They sure do make it difficult for the successor beneficiaries.
The deciding factor for me would depend on how much 3-5% of your estate amounts to and whether it would result in a big tax hit for your successor beneficiaries.

JosephineP
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Re: TSP - Surviving spouse should probably move out of the TSP

Post by JosephineP » Sun Sep 25, 2016 10:24 am

Cherijoh,
Thanks for your reply. Your point is well-taken, and I have first-hand experience as my healthy husband died suddenly and unexpectedly when he was not much older than 50. His parents, aunts and uncles lived/ are alive into their 80s and 90s. Life -- and death -- is unpredictable.

And yes, I do have all the legal documents in place (will -- including testamentary trust, POAs, etc.) to protect my children and estate in the event of my death. I also have several term life insurance policies in place, so if I die prematurely, there will be a tax-free pot of money that their guardian will be able to use to pay taxes.

I'm just confused because I hear about how great the G Fund is, and how, if you have your own TSP, you should cherish it :happy

So I'm not sure if I should walk away from it, and I'm trying to understand the factors I should be considering if I were to contemplate rolling it over.

2cents,
Sorry I didn't include that. The TSP has around $40-50K in it, so the income tax hit should be minimal, but I have no idea how taxes work for orphaned children who are under a guardian's care. (For example, would the guardian who's caring for them, and, I assume, claiming them as dependents, be liable for any of the tax liability? And maybe this is a moot point, as the life insurance will be sufficient to cover the tax liability.)

I should also mention, unless I get remarried or the tax laws change (and hey, what're the chances of that happening :?: :!: ) I anticipate there will be no estate tax impact, as I filed for DSUE portability after my husband died, just to be on the safe side.

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Re: TSP - Surviving spouse should probably move out of the TSP

Post by Info_Hound » Sun Sep 25, 2016 11:29 am

I have already lived this, I am a surviving spouse of a young Fed who died suddenly leaving a large TSP account. It's been almost 7 years now and my daughter and I miss him every day.

Like you I want to leave something behind for my daughter when I pass but don't want to cash in the TSP account as I like the safe bond haven of the G fund while being a bit more adventurous with my IRA holdings to give me my desired asset allocation. Being older than the OP I have some other things to consider as part of my whole financial picture.

I kept my IRA funds separate from the TSP funds until I retired in my early 60's. Because of the TSP's lack of withdrawal options I transferred most of the TSP funds into my IRA account (TSP partial withdrawal - 1 time only allowed) so I could convert some of the TSP funds into a ROTH. The funds that remain in the TSP currently will be withdrawn just before I reach my TSP RMD age of 78 and then moved into an IRA.

Don't forget that the TSP has different rules than the IRS for establishing when the survivor must begin taking RMD withdrawals. Another thing to consider if you are a benefit survivor participant. Age 70 is not written in stone for a TSP account RMD.

By holding a nominal amount in the TSP account, upon my death my daughter will not be hit with a large tax bill when the account is paid out if it is before my planned final TSP withdrawal around age 78. A large amount of my retirement saving funds are held in my IRA which she can convert into an IRA that pays out over time. In the mean time I have been doing ROTH conversions (using the withdrawn TSP funds) that will pass to her tax free upon my death.

No, I can't predict when I will die, but my current plan is to use the TSP account as just another retirement account but make it work with all the moving parts of my financial picture and future plans. Those plans include passing on a financial gift to our daughter and minimizing the tax burden on her and I as much as possible.

For your further reading pleasure this is from the TSP web site:
The date on which you must begin receiving required minimum distributions (RMDs) depends on whether the deceased participant died before or on/after his or her "required beginning date." The required beginning date is defined as April 1 of the year following the year a participant reaches age 70½, or separates from government service, whichever is later.
For example, if a separated participant was born on June 1, 1945, he or she would turn age 70½ on December 1, 2015; and his or her required beginning date would be April 1, 2016.
https://www.tsp.gov/PlanParticipation/B ... rmdbp.html

More detailed info here:
https://www.tsp.gov/PDF/formspubs/tsp-776.pdf

JosephineP
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Re: TSP - Surviving spouse should probably move out of the TSP

Post by JosephineP » Sun Sep 25, 2016 12:01 pm

Info_Hound wrote:I have already lived this, I am a surviving spouse of a young Fed who died suddenly leaving a large TSP account. It's been almost 7 years now and my daughter and I miss him every day.

Like you I want to leave something behind for my daughter when I pass but don't want to cash in the TSP account as I like the safe bond haven of the G fund while being a bit more adventurous with my IRA holdings to give me my desired asset allocation. Being older than the OP I have some other things to consider as part of my whole financial picture.

I kept my IRA funds separate from the TSP funds until I retired in my early 60's. Because of the TSP's lack of withdrawal options I transferred most of the TSP funds into my IRA account (TSP partial withdrawal - 1 time only allowed) so I could convert some of the TSP funds into a ROTH. The funds that remain in the TSP currently will be withdrawn just before I reach my TSP RMD age of 78 and then moved into an IRA.

Don't forget that the TSP has different rules than the IRS for establishing when the survivor must begin taking RMD withdrawals. Another thing to consider if you are a benefit survivor participant. Age 70 is not written in stone for a TSP account RMD.

By holding a nominal amount in the TSP account, upon my death my daughter will not be hit with a large tax bill when the account is paid out if it is before my planned final TSP withdrawal around age 78. A large amount of my retirement saving funds are held in my IRA which she can convert into an IRA that pays out over time. In the mean time I have been doing ROTH conversions (using the withdrawn TSP funds) that will pass to her tax free upon my death.

No, I can't predict when I will die, but my current plan is to use the TSP account as just another retirement account but make it work with all the moving parts of my financial picture and future plans. Those plans include passing on a financial gift to our daughter and minimizing the tax burden on her and I as much as possible.

For your further reading pleasure this is from the TSP web site:
The date on which you must begin receiving required minimum distributions (RMDs) depends on whether the deceased participant died before or on/after his or her "required beginning date." The required beginning date is defined as April 1 of the year following the year a participant reaches age 70½, or separates from government service, whichever is later.
For example, if a separated participant was born on June 1, 1945, he or she would turn age 70½ on December 1, 2015; and his or her required beginning date would be April 1, 2016.
https://www.tsp.gov/PlanParticipation/B ... rmdbp.html

More detailed info here:
https://www.tsp.gov/PDF/formspubs/tsp-776.pdf
Info_Hound: I am so sorry for your loss. The "Young Widows/Widowers Club" is a group that nobody should ever have to join. I pray for peace for you and your daughter.

I am so grateful that you have shared this. I had no idea about the RMD rules for TSPs. It's clear that I need to read more about this, and I very much appreciate your sharing those links.

I also appreciate your candor in describing your own plan for integrating your TSP with existing IRAs and Roth conversions. It's a great comfort to hear your explanation of what you're doing and why.

I just love this site.

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Re: TSP - Surviving spouse should probably move out of the TSP

Post by LadyGeek » Sun Sep 25, 2016 12:25 pm

This thread is now in the wiki: TSP estate planning ("External links")

Is there anything that needs to be revised as a result of this discussion?
clydewolf wrote:Some more information on the protection of your IRA:
- From the WSJ: http://www.wsj.com/articles/SB124181801239401917
- From a Supreme Court Ruling, you can link to the case: https://www.trustetc.com/resources/educ ... urt-ruling
- State by State analysis of IRA protection as of December 2013: http://www.thetaxadviser.com/content/da ... achart.pdf

Note that the IRS and other government organizations can seize your IRA or 401k.
Thank you! The wiki has been updated: Asset protection (Investing in an IRA, first paragraph) How's it look?
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Re: TSP - Surviving spouse should probably move out of the TSP

Post by Info_Hound » Mon Sep 26, 2016 9:43 am

Lady Geek

I checked out the Wiki page and the info all looks correct along with the links.

I do have a question - Where did the TSP RMD that applies to beneficiaries end up? It is a rather odd duck in the RMD guidelines and if a surviving spouse was considerably younger than the deceased they will find themselves impacted by this much sooner than normally expected.

Thanks for the wiki updates!

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Re: TSP - Surviving spouse should probably move out of the TSP

Post by 2cents2 » Wed Sep 28, 2016 10:59 am

Lady geek,
There is another option for beneficiaries who also have their own TSP account that might be relevant:

"If you have an existing TSP account from your own employment with the Federal Government or the uni­ formed services, you can move your bene ciary partici­ pant account into your existing TSP account The money
that you move will be treated as an employee contribu­ tion, but it will not be subject to the Internal Revenue Code (IRC) annual elective deferral limit, which limits the amount of regular tax­deferred and Roth contribu­ tions you can make to the TSP in a calendar year
To make the request to combine your TSP accounts, submit Form TSP­90, Withdrawal Request for Bene ci­ ary Participants Call the ThriftLine (1­877­968­3778) and speak to a Participant Service Representative for speci c instructions on how to use the form for this purpose
In general, once you combine your bene ciary partici­ pant account with your existing TSP account, your bene ciary participant account money will be subject to the rules that govern the account to which it was moved An important exception is the application of a “Roth Initiation Date,” — the date of the rst Roth contribu­ tion — which is used to calculate whether earnings on Roth contributions qualify to be paid out tax­free If Roth contributions were made to both accounts, the Roth Initiation Date that will apply to your combined account is the earlier of the two, even if the earlier date was associated with the bene ciary participant account If only one of the accounts contains Roth money, the Roth Initiation Date associated with that account be­ comes the date for your combined account
In addition, when you transfer your bene ciary partici­ pant account into your own TSP account, distributions of Roth earnings are quali ed (paid tax­free) if 5 years have passed since January 1 of the calendar year when the rst Roth contribution was made However, once the money is moved out of the bene ciary partici­ pant account, the following additional rule applies for the earnings to be quali ed: You must be at least age 591⁄2, permanently disabled, or deceased."


This would solve the successor beneficiary problem, but the funds will be subject to the rules that govern the account to which it was moved so it could have other complications (especially if the money is needed prior retirement age).

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