Have You Named A Beneficiary for Your Federal Retirement Plan?

The time is now to name a beneficiary for your federal retirement plan.

Thift Savings Plan (TSP) Accounts: Beneficiaries

Federal employees who are members of a Thrift Savings Plan need to submit a Form TSP-3. Court orders, marital settlement agreements, and even prenuptial agreements are not a substitute. You must complete Form TSP-3 and name one or more beneficiaries, who may be natural persons, a corporation, or a charity, among others.

Because your primary beneficiary may die before you (or at the same time), Form TSP-3 also allows you to designate contingent beneficiaries. After completing Form TSP-3, you must send it to the address contained on the form (or send it by fax to the number provided). It is important to review the beneficiary designation from time to time, as family situations change (divorce, remarriage, etc.).

If you fail to file a valid Form TSP-3 prior to your death, the law requires that the following order of precedence be followed:

  • To your widow(-er);
  • If none, to your child or children equally, and to the descendants of any deceased children (in such case, the money will be equally split among the surviving grandchildren);
  • If none, to your parents equally or to the surviving parent;
  • If none, to the executor or administrator of your estate;
  • If none, to your next of kin.

Beneficiary Participant Account

Upon your death, if your surviving spouse is entitled to any portion of your account, by way of your designation of him/her as a beneficiary or not, the TSP administrator will establish a Beneficiary Participant Account (“BPA”) where your spouse’s share of benefits is greater than $200 (if the benefit is less than $200, then your spouse will simply receive a check outright). The TSP administrator will maintain the BPA, which will be invested in the Government Securities Investment Fund, until your spouse elects a different investment choice, or withdraws the money in a single payment, monthly payments, annuity or any combination thereof.

Tax Considerations

It is often said that the only two sure things in life are death and taxes, and in the case of TSP survivor benefits, they go together. For more information about tax consequences of a distribution from a TSP account, you should read the publication entitled “Important Tax Information About Thrift Savings Plan Death Benefit Payments” issued by the Federal Retirement Thrift Investment Board (TSP-583).

Generally, however, you should be aware that because contributions to the TSP are tax-deferred, meaning that the federal government did not get its cut of your money at the time of your contribution to the TSP account, any death benefits paid from TSP account will be taxed. You should also note that while your beneficiary may transfer death benefits to an “Inherited IRA,” such benefits may NOT be transferred to a traditional or Roth IRA, or any other Non-Inherited IRA account. The tax consequences are complicated and for further information, you should seek the advice of an experienced tax adviser.

Loans Against TSP Account

If, at the time of your death, you had any outstanding loans against your TSP account, death benefits will not be paid until and unless the outstanding loan amount is declared to be a taxable distribution. The loan is declared as taxable income to your estate, not to your beneficiaries. Neither your estate or beneficiaries may repay the loan.

If you have questions about your federal retirement plan, contact the experienced Illinois attorneys of Martoccio & Martoccio at 630-920-8855 for a free consultation.

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