Key Takeaways
- Inherited TSP rules affect both how accounts are passed and what options beneficiaries have, especially for spouses and non-spouses.
- Understanding TSP inheritance is essential for federal employees and retirees to make informed decisions about retirement planning.
Introduction
The Thrift Savings Plan (TSP) is a central part of the federal retirement benefit system. If you are a federal employee or retiree, your TSP account is likely one of your largest retirement resources. But what happens when a TSP participant passes away? This article explains what inherited TSP accounts are, explores the key rules for both employees and retirees, and lays out the advantages and disadvantages of inheriting a TSP. By understanding these rules, you can make more informed decisions for yourself and your loved ones.
What Is an Inherited TSP Account?
An inherited TSP account is a Thrift Savings Plan account left to a beneficiary after the original account holder (the participant) dies. According to TSP’s official publications, the rights and options you have depend on your relationship to the original account owner. Spouses, non-spouse beneficiaries, and in some cases, minors, may be eligible to receive the account. TSP’s guidance makes clear distinctions between these groups and their respective rules.
Why Do Inherited TSP Rules Matter?
Knowing the rules of TSP inheritance is a vital part of retirement and estate planning. These rules can affect the financial security of your beneficiaries, the choices they can make, and the timing of those decisions. Understanding these differences helps ensure that benefits are used in line with your wishes, and that your loved ones do not face unnecessary complications or deadlines.
Key Rules for Inheriting a TSP
Eligibility for Inheriting TSP Accounts
When a TSP participant passes away, the account passes according to the beneficiary designations on file. If none exist, federal law determines who inherits, starting with the spouse, then children, and so on. Eligible beneficiaries include:
- Spouses
- Non-spouse individuals (such as children, friends, or other relatives)
- Minors (though special rules apply)
Each group has different rights and requirements when it comes to managing the inherited TSP.
What Options Do Spouse Beneficiaries Have?
Spouses who inherit a TSP have several choices, as outlined by TSP regulations:
- Remain in the TSP: Spouse beneficiaries may transfer the account into a separate “beneficiary participant account” within TSP, allowing continued access to TSP’s investment options and federal plan structure.
- Roll Over to Own Retirement Account: A surviving spouse can move the inherited funds into their own IRA or another eligible retirement plan, if desired.
- Take a Lump-Sum Distribution: Immediate withdrawal is also permitted, though this may trigger taxes depending on account type.
These options may differ from other retirement account plans you may be familiar with, as TSP has unique administrative processes and withdrawal policies for spouses.
What Choices Do Non-Spouse Beneficiaries Get?
Non-spouse beneficiaries, including children, relatives, or others, have a more limited set of options:
- Direct Payout: Most non-spouse beneficiaries must take the inherited TSP as a lump-sum distribution. The TSP generally will not maintain a long-term account for non-spouses.
- Inherited IRA Transfer: In some cases, a non-spouse beneficiary may be able to transfer the funds to an “inherited IRA,” subject to federal rules and timelines.
TSP’s official regulations specify particular time frames within which non-spouse beneficiaries must act, often mandating payout or transfer actions within a year after the original account holder’s death.
What Are the Pros of Inheriting a TSP?
- Additional Retirement Support: Inheriting a TSP provides beneficiaries with extra retirement resources to help with long-term planning or immediate financial needs.
- Federal Plan Structure: The TSP typically features lower administrative costs than many private-sector retirement plans.
- Withdrawal Flexibility (for Spouses): Spouse beneficiaries can access withdrawal options similar to those available to the original participant, potentially spreading out distributions over multiple years.
- Deferral Opportunities: In some circumstances, distributions can be deferred, giving the beneficiary control over the timing—though these opportunities vary with the type of beneficiary and must follow TSP rules.
What Are the Cons of Inheriting a TSP?
- Distribution Requirements and Time Limits: Beneficiaries may face required minimum distributions (RMDs) or short time frames to withdraw or move assets, especially for non-spouse recipients.
- Limited Investment Menu: TSP offers a focused set of funds, which may not match the broader choices available in other retirement accounts.
- Potential Tax Implications: Taking distributions or transferring funds can trigger taxable events, based on whether the inherited account was traditional or Roth TSP. Details depend on IRS rules and individual circumstances.
- Paperwork and Decision Complexity: Managing an inherited TSP account involves navigating several forms, deadlines, and potential decisions during a sensitive time.
How Are Taxes Handled on Inherited TSPs?
When withdrawing funds from an inherited TSP, the tax treatment depends on the account type:
- Traditional TSP: Distributions are generally subject to federal income tax at ordinary rates. Withholding often applies at the time of distribution.
- Roth TSP: Qualified distributions from Roth accounts may be tax-free, though certain criteria must be met. Non-qualified withdrawals could have partial tax implications.
TSP strongly encourages beneficiaries to consult official IRS guidance for specifics, as tax rules can change and the impact varies case by case.
Can You Roll Over an Inherited TSP Account?
- Spouse Beneficiaries: Spouses may roll over an inherited TSP to an IRA or another employer-sponsored plan. Doing so can provide additional withdrawal flexibility and continued tax deferral, subject to federal regulations.
- Non-Spouse Beneficiaries: Generally, non-spouses are limited to rolling the funds into an “inherited IRA” and must meet strict timing and documentation requirements. Restrictions are based on the IRS and TSP policies and may limit long-term deferral options.
As of 2026, these rollover options and restrictions remain as outlined here. Always verify details through official TSP resources.
Considerations for Federal Employees and Retirees
Whether you are still working or are retired, it is important to understand how inherited TSP accounts fit into your overall plans. If you are listing beneficiaries, make sure your TSP forms are current—outdated or missing forms can create complications. Differences also exist depending on whether you are the account owner or the intended beneficiary, so keeping your information up to date and understanding the implications is critical.
Frequently Asked Questions
Can minors inherit a TSP account?
Yes, minors can inherit a TSP, but a guardian or custodian must manage the account until the child reaches adulthood.
How quickly must a beneficiary act?
Actions such as claiming the account and choosing distributions generally need to begin within a year of the participant’s passing. Faster action may help avoid delays or missed options.
Do inherited TSP accounts affect FEHB or other retirement benefits?
Inherited TSP accounts are separate from benefits like FEHB, CSRS, or FERS annuities. Managing a TSP inheritance does not change eligibility for other retirement programs.
Conclusion
Inherited TSP accounts are governed by a clear set of federal rules that depend on your relationship to the original TSP participant. Spouses and non-spouse beneficiaries each have specific options and responsibilities, with pros including expanded retirement resources and cons like distribution requirements and potential tax impacts. Always review official TSP materials and consider your personal circumstances carefully when planning for or managing an inherited TSP.
