TSP plans/liquidation of a beneficiary participant account
My understanding is the following:
Let’s say you have the Barney and Betty Rubble family and that Barney is a Federal Employee with a Thrift Savings Plan (TSP). Barney then dies and leaves his TSP to Betty. So far, so good, she has what is now referred to as a beneficiary participant account. She can maintain it or roll it over to an IRA. Betty gets on the ball and names Bamm-Bamm as her beneficiary.
Betty dies shortly thereafter and now the problem surfaces. Bamm-Bamm cannot maintain the account and he can’t roll it over into an IRA. It must be distributed in full to him.
That was the rule, but I am just wondering if that changed with the recent act that made other employer plans have to allow for a rollover.
Lee
Permalink Submitted by Alan Spross on Fri, 2011-07-22 19:24
Lee,
This scenario illustrates a problem, and one that you do not hear much about at this point, but will probably cause big problems very soon.
Under the Pension Protection Act and subsequent rulings, qualified plans (eg TSP) MUST provide direct rollovers to inherited IRAs for non spouse designated beneficiaries. However, the definition of a designated beneficiary is one that is named by the employee, ie Betty. Bamm Bamm is just a successor beneficiary named by Betty and not a designated beneficiary. Therefore, there is no provision now for a transfer to an inherited IRA for Bamm Bamm. This is probably the problem you are facing.
Betty should have done the IRA rollover and assumed ownership if over 59.5, or could have initially maintained an inherited IRA if under 59.5. If that had been done and she then named Bamm Bamm as IRA either successor beneficiary if inherited or designated beneficiary if owned, then Bamm Bamm would now have a new stretch using his own life expectancy.
Note: When Betty would had had to begin IRA RMDs from her inherited IRA, she would need to roll over an IRA held as beneficiary in order to preserve Bamm Bamms stretch.
Not sure what the TSP provisions are for Bamm Bamm here, since a plan can adopt more restrictive provisions than the IRS rules. A lump sum may be the only option.
Permalink Submitted by Sam Brewster on Mon, 2013-05-13 20:30
I am in the exact predicament outlined by this scenario… Both of my parents died in 2012 five months apart. I am now a beneficiary of an beneficiary TSP account – so I am Bamm Bamm. According to TSP my only option is to take the money in the TSP account as ordinary income for 2013. Does anyone know a way around that? Sam
Permalink Submitted by Alan - IRA critic on Mon, 2013-05-13 22:07
According to following link (p 13 non spouse beneficiary), you should be able to establish an inherited IRA and request that the TSP directly transfer the balance to the inherited IRA, and then you can take life expectancy RMDs. If the TSP mails you the check, that is still OK as a transfer as long as the check is made out to your inherited IRA custodian for your benefit, and not directly to you.https://www.tsp.gov/PDF/formspubs/tspbk31.pdf
Permalink Submitted by Bruce Steiner on Mon, 2013-05-13 23:02
Although it works pretty much the same as a qualified plan, the Thrift Savings Plan is not a qualfied plan. It’s created under a separate law.In the case of a qualified plan, the general rule is that if Barney leaves his benefits to Betty and Betty dies before rolling them over, BammBamm can’t stretch them over his own life expectancy. However, there’s an exception if Betty dies before Barney would have reached age 70 1/2. See Section 401(a)(9)(B)(iv).Although the Thrift Savings Plan generally works the same way as a qualified plan, since it’s not actually a qualified plan, you’ll have to check to see if the same exception is available for the Thrift Savings Plan (assuming Betty died before Barney would have reached age 70 1/2).
Permalink Submitted by Alan - IRA critic on Tue, 2013-05-14 00:33
I agree. I should have gone into more detail regarding the “life expectancy RMDs’ I referred to. SInce both parents passed in the same year, they were probably beyond 70.5, and in that case as successor beneficiary of an already inherited TSP plan, the life expectancy used in the inherited IRA after transfer would be the remaining life expectancy of the last parent to die. The successor beneficiary could only use their own life expectancy if the second parent to die passed prior to the year the first parent would have reached age 70.5. You might want to post the ages of each parent at their death. In any event, even if the second parent’s life expectancy must be used it would be much more favorable than a lump sum distribution.
Permalink Submitted by Sam Brewster on Mon, 2013-05-20 13:50
My Father and my mother were both 61 when they passed away. My father died of cancer and my mother passed suddenly. TSP informed me that my only option is to take a lump sum payment in year 2013. That payment will be reported to the IRS on a 1099R. I am considering the following options:· Disclaiming the money – it would be paid to the estate instead of coming to me as income…. I am not familiar with how an estate is tax on income and I have no idea if I am entitled to that money after I have disclaimed it?· Request a letter ruling from the IRS and ask them to allow me to roll the lump sum payment into an inherited IRA – the basis would be that other employee plans have that option for beneficiaries and TSP is slow to act. My father worked 30 long years as a federal employee. It would be a shame if 50% of his money went to taxes (state estate tax, state tax, federal tax). Thank you both for your input – Sam
Permalink Submitted by Alan - IRA critic on Mon, 2013-05-20 16:04
You cannot disclaim if you are an estate beneficiary because a qualified disclaimer requires that only a spouse can disclaim and receive the death benefit from the estate or trust. If there is a will that names someone else as beneficiary of the estate, then you could disclaim. With respect to a letter ruling, that would cost around 10k plus legal fees and would likely not be successful since plans are allowed to have more restrictive requirements than the IRS allows if they wish. While there may not be enough time to hold off the TSP distribution, note that a provision in Obama’s proposed budget allows a non spouse beneficiary to roll over distributions like this within 60 days of distribution. You may want to track developments with respect to this proposed provision.
Permalink Submitted by Sam Brewster on Mon, 2013-05-20 19:33
Where can I find this provision? I would like to read about it. I must inform TSP by July 30, 2013 on how to disburse the money (with or without withholdings). Thanks – Sam
Permalink Submitted by Sam Brewster on Mon, 2013-05-20 19:36
Also – I forgot to mention that I am named in the will as a beneficiary of my Mother’s estate. Will the estate pay income tax?
Permalink Submitted by Alan - IRA critic on Mon, 2013-05-20 19:51
Here is a link explaining all the provisions, but there is a also a proposal to limit the stretch to 5 years for a non spouse beneficiary. Details are naturally limited since these are just broad proposals at this point and your time frame is very limited: http://www.morningstar.com/advisor/t/74752143/president-proposes-ira-changes.htm
Permalink Submitted by Bruce Steiner on Fri, 2011-07-22 19:52
While it’s technically not a 401(k) plan (it’s created under a separate Federal law), the Thrift Savings Plan generally works the same way as a 401(k) plan, and generally provides the choices that a 401(k) can provide. For specifics, see their website http://www.tsp.gov. There’s lots of information there.
In New Jersey, employees are not currently taxable on 401(k) contributions, but since the TSP is technically not a 401(k) plan, New Jersey takes the position that Federal employees are currently taxable on their TSP contributions, so they end up with a higher amount of wages for New Jersey purposes than for Federal purposes.
Permalink Submitted by Alan Spross on Fri, 2011-07-22 20:29
See p 4-B of the attached – re “Beneficiary of a Beneficiary”. Apparently, the non spouse successor beneficiary will get a lump sum distribution, no other options.
https://www.tsp.gov/PDF/formspubs/tspbk31.pdf
Permalink Submitted by Lee Martinson on Fri, 2011-07-22 22:50
Thanks, that clears it up. I thought that the legislation make it so they couldn’t do that, but I see what you are saying, the legislation only applies to the beneficiary, not the successor beneficiary.
Permalink Submitted by Alan Spross on Fri, 2011-07-22 22:58
Thanks for bringing this up. As the age of the TSP advances, there will be many more of these successor beneficiary issues. Many people want to retain the TSP account for it’s very low operating ratios and possibly creditor protection in some states, and when the surviving spouse passes the children are going to get slammed with a huge tax bill. The tax code does not allow inherited IRA rollovers for successor beneficiaries, not even remarried spouses. Therefore the TSP would either have to allow something better than a lump sum, eg a 5 year payout to avoid the worst of these problems. If not, then they should put a warning in their reference material about the tax costs to successor beneficiaries should the designated beneficiary pass. That applies whether the designated beneficiary is a spouse or a non spouse.