(This article originally appeared in the September 2024 issue of Military Officer, a magazine available to all MOAA Premium and Life members. Learn more about the magazine here; learn more about joining MOAA here.)

For participants in the Thrift Savings Plan (TSP), it’s important to understand how assets in the plan pass upon death so there are no surprises — or unintended consequences — for loved ones.

How Beneficiary Designations Work

It’s vitally important to assign a beneficiary for your TSP account (and any other retirement accounts). Death benefits are based on beneficiary designations. Wills, divorce agreements, prenuptial arrangements, and court orders do not apply.

If there is no beneficiary designation and you die with a balance in your TSP account, the account will be distributed according to the following order of precedence, which is required by law: spouse, then child or children equally (and any share due a deceased child divided equally among that child’s descendants), then parents equally or surviving parent, then the appointed executor of your estate.

If none of the above exist, then the account is distributed to your next of kin who is entitled to your estate under the laws of the state you reside in at time of death.

[RELATED: Understanding the Thrift Savings Plan Withdrawal Process]

You can designate up to 20 beneficiaries on your account, and they can be persons, a trust, a corporation, an estate, or a charitable organization.

Death Benefits

If a spouse is the beneficiary of an account, the TSP establishes a beneficiary participant account in the spouse’s name. The money in the account will be invested exactly the same way as it was in the deceased person’s account except for any money invested in the mutual fund window — that will be reinvested in TSP funds based on the investment elections on file.

The spouse beneficiary can keep the balance in their TSP beneficiary account if they wish.

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If the beneficiary on a TSP account is not a spouse, they can’t have a beneficiary participant account. The TSP will establish a temporary account for the non-spouse beneficiary. Payment from this account will be made directly to the non-spouse beneficiary or to an inherited individual retirement account (IRA).

Tax Implications

Traditional accounts that are disbursed will be subject to federal income tax. Roth accounts are not subject to federal income tax, but earnings may be if less than five years have passed since the deceased participant made their first contribution.

Spouse beneficiaries can defer potential tax liability by keeping the funds in their beneficiary participant account or by rolling the funds into an IRA or an eligible employer plan.

Non-spouse beneficiaries can defer potential taxes by rolling their TSP payment directly into an inherited IRA. But they must act quickly — non-spouse beneficiaries have 90 days to request payment from their temporary TSP account. If they don’t, the TSP will automatically cash out the account and send a check. A death benefit paid out directly in this way may not be rolled over to an IRA.

[RELATED: Prepare Your Heirs: 5 Tips for Passing on Retirement Accounts]

Spouse Beneficiaries May Want to Move the Money

If a spouse who has a beneficiary account dies, their beneficiary or beneficiaries cannot continue to maintain the account in the TSP. Death benefit payments must be paid directly to the beneficiary(ies).

According to the TSP Death Plan Benefits bulletin 14-4, “These payments are subject to certain tax restrictions and cannot be transferred or rolled over into an IRA or eligible employer plan. In addition, these payments will be fully taxable in the year the beneficiary(ies) receives them. Any payments from tax-exempt money are not subject to taxes when distributed.”

This is one reason why some financial planners advise against keeping spousal beneficiary accounts.

“I generally recommend that spousal beneficiaries of TSP accounts roll them over to either an inherited spousal IRA or into their own IRA. This allows for the next line of beneficiaries to be able to have the longer terms for withdrawal, which are currently up to 10 years under the SECURE Act. This can be a major tax impact savings to the next line of beneficiaries,” said MOAA Premium member Daniel Kopp, CFP®, of Wise Stewardship Financial Planning, whose firm often helps military survivors navigate their benefits.