How a TSP inheritance is taxed depends on who the beneficiary is and how quickly they act. A spouse beneficiary can defer taxes through a BPA or IRA rollover. Non-spouse beneficiaries have 90 days to request a rollover into an inherited IRA, and missing that window triggers an automatic, fully taxable payout. A large payout can push a beneficiary into a higher tax bracket for that year.
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How a TSP inheritance gets taxed depends heavily on who the beneficiary is and how quickly they act.
Spouse beneficiaries have more flexibility. They can defer taxes by keeping the funds in the BPA or rolling them into an IRA. That gives them time to plan around their tax situation rather than taking a large hit all at once.
Non-spouse beneficiaries have a much tighter window. They have 90 days to request a rollover into an inherited IRA. If they miss that window, the TSP automatically cashes out the account and sends them a check, and that full amount is taxable in the year that they receive it. Depending on the size of the account, that can push them into a significantly higher tax bracket for that year.
The 90-day clock moves fast, and a lot of non-spouse beneficiaries don't realize it's running until it's already too late. Knowing this rule ahead of time, and making sure your beneficiaries know it too, is one of the more important things you can do as part of your overall plan.
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