TSP with No Beneficiary | Ed Slott and Company, LLC

TSP with No Beneficiary

Individual has a TSP, dies without a beneficiary. Living parents plan to disclaim it. It then goes to the estate. Does it go to the estate in the form of a rollover IRA or does it become a taxable event to the estate? From there, if we follow the provisions of the will, can it be divided 1/3 each into beneficiary IRAs for the three siblings (per direction of the will)?

From the TSP site:(2)Payment to executor or administrator. If payment is to the executor or administrator of an estate, the check will be made payable to the estate of the deceased participant, not to the executor or administrator. A TIN must be provided for all estates.Will this be considered a taxable distribution?  Can this then go into inherited IRAs for the beneficiaries of the estate?

Generally, not having a designated beneficiary produces negative consequences, but it's worse when the plan is a non IRA plan like the TSP as compared to an IRA left to an estate. The reason is that a direct rollover of the plan (TSP in this case) to an inherited IRA is not possible under IRS rules. There is no way around the distribution to the estate which is taxable to the estate on Form 1041. There is no stretch for the will beneficiaries, as the estate will typically pass each will beneficiary's share of the TSP distribution out to them and they will have to report the taxable income on their own 1040. Their marginal rate should be much lower than what the estate would pay.

It appears that the default beneficiary under the TSP is the spouse, then children of the deceased, then the parents of the deceased, then the estate.  With the parents as the default beneficiaries, it seems that the each parent's share might be able to be directly rolled over from TSP to an inherited IRA for the particular parent's benefit.  However, I'm not sure if a default beneficiary who is an individual actually qualifies as a designated beneficiary under 401(a)(9)(E) which defines a designated beneficiary for this purpose as "any individual designated as a beneficiary by the employee."  If the parents disclaim and the TSP goes to the estate, it's certain that no inherited IRAs are permitted to be established.


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