Many banks and financial planners encourage people to leave the TSP because they would love to have their business, money and investments in stocks, funds and options they offer. That’s big bucks!
Some current TSP investors are concerned about what happens to their accounts when they die. Lynda M. asked:
“I read this article regarding withdrawing your money after you leave federal service. I’m a retiree but have not withdrawn my money. I was told by a financial adviser … that one of the reasons to withdraw funds from the TSP is so your heirs could ‘stretch’ their inheritance, and this was not possible with the TSP. Is this something that could be considered in the future, or would the management of this option be too costly?”
Very good question. When I passed it on to Kim Weaver, director of external affairs for the Federal Retirement Thrift Investment Board, this what she told us:
“What this participant is asking applies to when a spouse inherits a TSP account. The TSP will establish a beneficiary participant account for the spouse. This allows the spouse to keep the money in the TSP and invest it as they choose.
“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.”
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