TSP beneficiary question

[JD1964]

I've set up a trust to manage passing my assets to my family members when I die. I'm concerned about how to best align the beneficiaries listed for my TSP account. Is it true that only a "primary" beneficiary can roll a TSP into an IRA? If so, and I want my trust to take disbursement of my TSP and roll it into an IRA, is it true that I must list the trust as the "primary" beneficiary?

I know there are other ways to manage passing assets and those ways may be a better choice. However, as I learn the rules and make my plans, I need to know the answer to my specific questions above. The reason is, in addition to making my own plans, I'm also trying to help another retired federal worker (family member) be clear on the rules too.

The language at this TSP website page linked below is what makes me believe in order for a trust to be able to convert a TSP to an IRA, the trust must be listed as the "primary beneficiary". Am I understanding this correctly?

This is the specific language I'm referring to:

Note: If a beneficiary participant dies, the new beneficiary(ies) cannot continue to maintain the account in the TSP. Also, the death benefit payment cannot be rolled over into any type of IRA or plan.

Thanks for your time.

https://www.tsp.gov/for-beneficiaries/beneficiary-distributions/

 

[JD1964]

Same concern is in this document too.

Under

II. Method of Payment

1. Spousal Beneficiaries

E.

https://www.tsp.gov/bulletins/14-4/

 

[tsptalk]

According to Grok:

Based on the information provided and the TSP rules, here’s a direct answer to your questions:

1. Can only a "primary" beneficiary roll a TSP into an IRA?
   
   Yes, only a primary beneficiary (or a surviving spouse, if applicable) can roll over a TSP death benefit payment into an IRA. The TSP rules specify that death benefit payments can be rolled over into an IRA or eligible plan only by a primary beneficiary, typically a spouse or a named individual. Non-spouse beneficiaries, including trusts, generally cannot roll over TSP distributions into an IRA.
   
   
2. Must the trust be listed as the "primary" beneficiary to roll a TSP into an IRA?
   
   No, a trust cannot roll a TSP distribution into an IRA, even if listed as the primary beneficiary. According to TSP regulations, only an individual (typically a surviving spouse) can roll over a TSP death benefit into an IRA or another eligible retirement plan. Trusts are not considered eligible entities for rollovers under TSP rules. If you name your trust as the primary beneficiary, the trust will receive the TSP funds as a lump-sum distribution (subject to applicable taxes and rules), but it cannot roll those funds into an IRA.
   
   
3. Are you understanding the TSP website language correctly?
   
   The language you referenced from the TSP website is correct but applies specifically to beneficiary participants (e.g., a spouse who inherits a TSP account and maintains it as a beneficiary participant account). The note indicates that if a beneficiary participant dies, their new beneficiaries (e.g., children or a trust) cannot maintain the account in the TSP, and the death benefit payment cannot be rolled over into an IRA. This aligns with the general rule that non-spouse beneficiaries, including trusts, cannot roll over TSP distributions.

Additional Notes:

• If your goal is for the trust to manage the TSP funds, you can name the trust as the primary beneficiary, but the trust will receive the funds as a taxable distribution, not as a rollover into an IRA. The trust would then distribute the funds to its beneficiaries according to its terms, subject to tax implications.
  
  
• For your family member (the retired federal worker), the same rules apply: naming a trust as the primary beneficiary will result in a lump-sum distribution to the trust, not a rollover into an IRA.
  
  
• If preserving the ability to roll over the TSP into an IRA is critical, consider naming a spouse or individual as the primary beneficiary, who could then roll the funds into an IRA and potentially transfer them to the trust later, depending on your estate plan. Consult an estate planning attorney or financial advisor to align this with your trust’s structure.

For further clarity, refer to the TSP’s official guidance on beneficiaries and death benefits at tsp.gov or consult with a TSP representative or estate planning professional, as trust and tax laws can be complex and situation-specific.

Disclaimer: Grok is not a financial adviser or a lawyer; please consult one. Don’t share information that can identify you.

 

[JD1964]

Awesome! This answers exactly what I needed to know. Thank you

 

[James48843]

Side note:,

Have a TSP Account? Know the Rules for Your Heirs

Find out what you can do in advance to ensure a smooth transition for your Thrift Savings Plan.

www.moaa.org

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

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.

(More at the link above. If you are leaving it to a Trust rather a spouse, there may be a taxable event.)

 

[JD1964]

I actually have an appointment with my trust lawyer on June 5. I’ll what else he can clarify for me. I’ll post back what I learn in the meeting.

 

[waltj]

What if there is no living spouse and only a TRUST. Does that mean I am up the proverbial creek?

 

[JD1964]

What if there is no living spouse and only a TRUST. Does that mean I am up the proverbial creek?

Well, have you looked at the tax rate table for trusts? If the TSP pays directly to the trust, the tax rate is 37% for anything over $15,600. And thats just federal. Add you state and local taxes to the bill as well.

 

[waltj]

Well, I guess the answer is YES. Back to the drawing board!

 

[JD1964]

As I said in my initial post, I'm trying to best manage my estate and also learn options so another family member can best manage theirs.

In my case, I'm 61 years old and have already begun in service withdrawals. I'm moving the money into an individual investment fund (not IRA). My reason for doing this is to go ahead and pay the tax at the rate which I can control during my remaining life. I can pull 35K per year and still keep that within the 12% married filing jointly bracket. I should have enough remaining years in life to get most of it moved over at 12% but maybe some will be in the 24%. On the other hand, if I roll it all over into a traditional IRA in which my kids inherit, they may choose the option to take the distribution in one lump sum which would result in that money being taxed at a much higher rate. With my strategy, they will inherit an account that has already had the majority of the tax liability paid at 12%, instead of them choosing to take a full IRA distribution at say, 24 or 32%.

My overall plan is also to transfer as much as my assets as possible through title by using beneficiary selections associated with each account. My goal here is to minimize the money handled by the trust and thus minimize the time and expense of administering the trust.

My family member has a substantially larger TSP than mine and they are 87 years old. They have a trust as a contingent beneficiary of the TSP. I'm concerned that if the TSP pays out to the trust, that tax bill will be much much higher than it needs to be. Obviously, they have fewer remaining years in life to use my strategy of managing tax liability at lower rates, however, they could at least begin to do so partially. It's well known that a TSP participant can roll a Traditional TSP into a Traditional IRA and doing so would give their heirs the option of spreading out the distributions over currently allowable 10 years max. If my family member is interested in minimizing tax liability to their heirs, I'm hoping to convince them revisit and adjust their current strategy. Obviously I would suggest doing all of this with the help of a CFP.