If the TSP beneficiary is a spouse, the account can become a Beneficiary Participant Account, which keeps the funds invested and growing tax-deferred, or the spouse can move the funds into an IRA. If the beneficiary is anyone other than a spouse, the TSP instead creates a temporary account that lasts only 90 days, after which unclaimed funds are automatically distributed and taxed.
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One of the most overlooked parts of the TSP account is what happens to the money when the account owner passes away. And the rules can be very different depending on who the beneficiary is.
If the beneficiary is a spouse, the TSP creates what's called a beneficiary participant account, or a BPA. The surviving spouse can keep the money inside the TSP, allowing it to remain invested and continue growing tax deferred. They also have the option to move the funds into an IRA if that better fits their long-term goals.
But the rules change significantly for non-spouse beneficiaries. If the beneficiary is a child, sibling, or anyone other than a spouse, the TSP does not allow a beneficiary participant account. Instead, the TSP creates a temporary account that only lasts 90 days. During that window, the non-spouse beneficiary must decide whether to transfer the funds into an inherited IRA. If they don't act in time, the TSP automatically distributes the balance directly to them, which can create a very large taxable event all in one year.
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