What Happens to Your Life Savings?

Some people might think that if they time it just right, they’ll spend all the money they’ve saved for retirement and die penniless. But more often than not, this is not the case. And that’s actually a good thing, don’t you agree?

Before we had the Thrift Savings Plan and other similar types of retirement savings programs, the average American worker didn’t have to worry much about estate planning and a good many -- especially those who needed expensive long-term care -- did use up all of their money before they died. My dad was one of them. He and my mother lived out their retirement years beginning in 1980 on a modest Teamster’s pension (with no cost of living adjustments) and Social Security retirement. They had a minimal amount of savings that they hoped would ultimately pass on to their grandchildren.

Unfortunately, after my mom died in 1996, my dad needed to be cared for in a nursing home for the last two years of his life. By the time he died in 1998, he had qualified for Medicaid and had less than $2,500 in the bank. My dad retired before his company offered a retirement savings plan and his pension was intended to provide a means to maintain a reasonable standard of living after retirement. But it didn’t afford anything close to a lavish lifestyle.

My parents were very happy that I married a federal employee who they knew would someday earn a government retirement (including cost of living adjustments). Even after I left federal service myself, they were impressed with the idea that I was setting aside a portion of my income to provide for retirement income. The current generation of baby boomer retirees is planning for a different retirement than many of our parents. We must become familiar with terms like estate planning and tax strategies, because many of us, thanks to our pre-retirement saving, will have estates to manage in our retirement years.

Today, more and more federal retirees are leaving federal service with significant balances in their TSP accounts, in some cases, hundreds of thousands of dollars invested. In addition to these large savings accounts, some federal retirees are able to live comfortably on their Civil Service Retirement System or Federal Employees Retirement System benefits along with Social Security (and for some, a military retirement benefit). Over the past year, the Office of Personnel Management has received more than 100,000 new retirement claims for processing. Many of the employees who make up this group of recent retirees have had the TSP available for most of their federal career.

If you have recently retired and are wondering what you can do with the money in your TSP account, you should know that you have as much, if not more, control of this money as you did while you were employed. Carefully consider your options, because there are many choices, each with its own set of risks and rewards.

In the past, I’ve written about the various withdrawal options from the TSP. Here are those columns:

• How Much TSP Can You Take? Dec. 20, 2013
• A New Tool from the TSP Sept. 6, 2013
• Leave It or Roll It? Sept. 26, 2013
• What To Do With Your TSP June 21, 2013
• Required Payouts April 12, 2013
• Another Look at Annuities June 24, 2011
• Income for Life Feb. 19, 2010
• TSP Withdrawal Quiz April 13, 2007
• Life Expectancy vs. Life Annuity April 6, 2007
• Withdrawal Options March 24, 2006

Who Gets Your Money?

Along with deciding what to do with your savings while you are living in retirement, it is also important to do some TSP estate planning. It is wise to give some thought to what might happen if you die with a considerable amount of savings.

Here are the basics: When a TSP participant dies, there is an order of precedence that determines who will inherit the balance of his or her account. If you do not file a designation of beneficiary form (TSP-3), under federal law your entire account will be distributed according to the following order of precedence:

• To your spouse;
• If none, to your child or children equally, and to the descendants of deceased children;
• 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 who is entitled to your estate under the laws of the state in which you lived at the time of your death.

A unique rule applies when a spouse inherits a TSP account regardless if that happens by designation on the beneficiary form or by payment through the standard order of precedence. The TSP establishes a beneficiary participant account for the spouse. This account allows the money to remain invested in the TSP, but the balance is automatically transferred entirely to the G Fund. Surviving spouses who become beneficiary participants can then transfer funds to the other TSP investment options and exercise the same withdrawal options as other separated TSP participants. But beneficiary participants are not eligible for TSP loans and the TSP will not accept transfers or rollovers into beneficiary participant accounts. The spouse beneficiary may designate his or her own beneficiaries using the TSP-3. Required distributions from these accounts are required based on the age of the deceased participant, not on the age of the spouse.

There is a very important distinction to remember about a beneficiary participant account: The death benefit payments to successor beneficiaries (i.e. beneficiaries of the spouse through the beneficiary participant account) may not be transferred or rolled over. This means that when the beneficiary participant dies, the money left in the account must be paid to the successor beneficiary as a single payment and may not be transferred or rolled over to an Individual Retirement Arrangement. This could create a tax burden.

Where to Put the Money

Because of this, if you are married, it might be a good idea to discuss what will happen to your TSP account if your spouse inherits this money after your death. The benefits of leaving the money in a beneficiary participant account include the following:

• Low administrative expenses.
• The simplicity of having the G, C, F, S, I and L funds to choose from.
• No penalty on early distributions. (In other words, the beneficiary does not have to wait until age 59 ½ to avoid the 10 percent early withdrawal tax penalty).
• No required distribution until the deceased participant would have turned 70 ½, rather than when the beneficiary turns 70 ½.

The owner of a TSP beneficiary participant account should consider these advantages, but also know that he or she has the option to transfer the money to their own IRA or employer plan. This option of moving the money out of the TSP beneficiary participant account and into an IRA could be advantageous for the following reasons:

• There is no tax penalty on IRA distributions after age 59 ½.
• Death benefit payments from an IRA may be transferred or rolled over to another IRA (including inherited IRAs that would allow further delay of the tax on the distributions).
• Required distributions from an IRA would be based on the beneficiary’s age, rather than on the age of the deceased participant. If the participant was older than the beneficiary, this would delay the date of the required mandatory distribution to the beneficiary’s age of 70 ½.

For More Information

Here are some TSP publications you may want to review with your spouse so he or she will understand the advantages and disadvantages of a beneficiary participant account:

• Death Benefits: Information for Beneficiary Participants
• Your TSP Account: A Guide for Beneficiary Participants
• Managing Your Account for Beneficiary Participants
• Required Minimum Distributions for Beneficiary Participants
• Tax Information: Payments From Your TSP Account
• Understanding Your Quarterly Statement for Beneficiary Participants