TSP for non-spouse beneficiary
I have read that a non-spouse beneficiary of a TSP account is subject to tax on the lump sum distribution, and it can’t be stretched out over 10 years as allowed by the SECURE act. Is this true?
I have read that a non-spouse beneficiary of a TSP account is subject to tax on the lump sum distribution, and it can’t be stretched out over 10 years as allowed by the SECURE act. Is this true?
Permalink Submitted by Alan - IRA critic on Sat, 2021-05-08 21:10
A non spouse beneficiary that does not want the tax impact of a lump sum distribution has another option. A direct rollover to an inherited IRA can be done. If the non spouse beneficiary is not an eligible designated beneficiary (a disabled person or a sibling not more than 10 years younger) than the 10 year rule will apply to the inherited IRA. However, the TSP has a deadline in which to request the direct rollover to avoid the lump sum distribution. In other words, the balance will not be retained by the TSP for the purpose of making any partial non spouse beneficiary distributions, therefore the direct rollover should be completed as soon as practical. A non spouse beneficiary has the option of a direct rollover to either an inherited TIRA or an inherited Roth IRA (taxable rollover). Should the non spouse beneficiary pass before completing the direct rollover, the beneficiary of the non spouse will receive a taxable lump sum distribution.
The TSP offers a “beneficiary participant account”, however such accounts are ONLY available for spousal beneficiaries, which makes the term somewhat misleading. A non spouse beneficiary therefore needs to take action to complete the direct rollover promptly.