TSP Inherited IRA – Unrequested Distribution

Submitted by Steven Goodell on Mon, 2023-03-20 21:31

I have a client who’s mother passed away. She had an IRA at TSP and the daughter was the sole beneficiary.

We contacted TSP to move the account to an inherited IRA. They said that a check would be issued to the daughter in 2 days, because they don’t hold inherited accounts.
We asked to have that stopped and to do a rollover into the inherited IRA, which they said they would try to do.

Well, a distribution check with 20% withholdings showed up today at the daughters house.
I know that there is no 60 day rollover for inherited IRAs.

What other options do we have. Could we try to go back to TSP and do a stop payment on the check. Any experience with TSP specifically on this?

Any suggestions?



Submitted by Alan - IRA critic on Mon, 2023-03-20 21:46

  • I doubt that the TSP will accept the check back unless they violated their own requirements. Had they warned the daughter of a deadline for a direct rollover to an inherited IRA, or was by chance the mother herself a beneficiary of a TSP account in which case the distribution could not be avoided?
  • More complicating is the withholding rate of 20% which is only for eligible rollover distributions. An inherited account distribution to a non spouse beneficiary is never rollover eligible, so the correct default rate should have been 10%. Either way, the daughter would probably have to replace the 20% for the TSP to accept the check back. Nothing can be done about the withholding now at the IRS except to have it applied to the next tax return. 

Submitted by David Mertz on Tue, 2023-03-21 01:48

  • For some reason, the TSP always withholds a minimum of 20% from a distribution paid to a non-spouse beneficiary.
  • Once notified of the death and provided with any information regarding potential beneficiaries, the TSP should have sent Form TSP-81 to be completed by the beneficiary to indicate the desired distribution(s).  Form TSP-81 has a section that must be completed and signed by the IRA custodian to certify the receiving account details for any direct rollover, the beneficiary’s signature must be notarized and then the completed Form TSP-81 must be sent to the TSP.  When the TSP sends Form TSP-81, they include a notice that indicates that a full distribution paid to the beneficiary will occur 90 days after the date of the notice.  The completed Form TSP-81 must be received by the TSP sufficiently before that date requesting a rollover if that is the intent.
  • Once the TSP receives the Form TSP-81, it appears that the TSP takes about 2 weeks to make the distribution(s), so it seems prudent to get the completed Form TSP-81 back to the TSP more than 2 weeks before the 90-day deadline.

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