Contributions to the TSP are generally tax-deferred. This means the participant

did not pay taxes on his or her own contributions, any agency contributions, or

earnings. As a consequence, you will owe taxes when you receive a death benefit

payment from a TSP account.

The TSP reports all TSP distributions to

the Internal Revenue Service (IRS), and to you, on IRS Form 1099-R,

Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans,

IRAs, Insurance Contracts, etc.

The TSP must withhold for federal income tax from payments it makes unless

the IRS allows the beneficiary to request that there be no with¬holding. The

federal income tax withholding and transfer and rollover rules that apply to a

death benefit payment depend upon whether the payment is made to the surviving

spouse or to someone else.

target=_blank>This chart (href="http://www.myfederalretirement.com/public/TSPDB-chart-1109.pdf"

target=_blank>Click here to download 1 page PDF) applies to

payments made after January 1, 2010. It describes the withholding rates and

indicates whether you can change or waive the withholding amount. If you want to

change the standard withholding, you must file IRS Form W-4P, Withholding

Certificate for Pension or Annuity Payments, with the TSP before the death

benefit payment is disbursed.

The TSP does not withhold for state or local income tax. However, on IRS Form

1 099-R, the TSP does report all TSP distributions to your state of residence at

the time of the payment (if that state has an income tax). You may need to pay

state and local income tax on your payment. Your tax advisor or state or local

tax officials can explain any potential tax obligations.

Transferring or Rolling Over a Payment

Your options for transferring or rolling over a TSP death benefit payment

depend upon whether you are the surviving spouse of the deceased participant or

a beneficiary other than the surviving spouse.

If you are the surviving spouse, you may be able to ask the TSP to transfer

all or a portion of your payment to a traditional individual retirement account

(IRA), eligible employer plan, or Roth IRA. If you receive the payment directly,

you may be able to deposit (roll over) the pay¬ment into a traditional IRA,

eligible employer plan, or Roth IRA yourself.

A traditional IRA is any IRA that is not a Roth IRA, a SIMPLE IRA, or an

education IRA.

An eligible employer plan includes a plan quali¬fied under section 401(a) of

the Internal Revenue Code (I.R.C.), such as a section 40 1(k) plan,

profit-sharing plan, defined benefit plan, stock bonus plan, and money purchase

plan; a section 403(a) annuity plan; a section 403(b) tax-shel¬tered annuity; a

section 457(b) plan maintained by a governmental employer; and the TSP.

A Roth IRA accepts only after-tax dollars, but provides tax-free growth. You

are not eligible for a Roth transfer if either one of the following conditions

applies: (1) your modified adjusted gross income is over $100,000 or (2) you are

married and file a separate return. Further, you must pay taxes on the funds you

transfer to a Roth IRA; the tax liability is incurred for the year of the

transfer.

Before you decide to transfer or roll over your payment, you should find out

whether your IRA or plan accepts transfers or rollovers and whether the IRA or

plan has a minimum amount it will accept. You should also familiarize yourself

with the plan or IRA. The tax treatment and plan rules for withdrawals from the

plan to which you transfer or roll over the distribution may be different from

those of the TSP.

If you are a surviving spouse and you have your own TSP account, you may roll

over --- or ask the TSP to transfer --- the death benefit payment into your TSP

account.

If you choose to have the TSP transfer all or part of the death benefit

payment:

• No income tax will be withheld at time of transfer.

• If your transfer is to a traditional IRA or eligible em¬ployer plan, it will

  be taxed at the time you withdraw it from that IRA or plan.

• If your transfer is to a Roth IRA, the entire amount will be taxed for the

  year of the transfer. You may need to pay estimated taxes to mitigate your tax

  liability.

If the TSP pays a death benefit payment directly to you, and you subsequently

decide to do a "rollover" to a traditional IRA or eligible employer plan:

• You will receive only 80% of the taxable amount of the payment because we

  are required to withhold 20% for Federal income tax.

• Your full payment will be taxed in the current year if you do not complete

  the rollover within 60 days of receiving the payment from the TSP.

• You can roll over all or part of the payment to your tra¬ditional IRA or

  plan. The amount rolled over will not be taxed until you take it out of the IRA

  or plan. However, if you want to roll over 100% of the payment, you must replace

  the 20% that was withheld with your own funds. If you roll over only the portion

  you received, you will be taxed on the 20% that was withheld and not rolled

  over.

You may be able to roll over your payment into a Roth IRA; the full amount

rolled over will be taxed in the current year.

If you are a beneficiary other than the surviving spouse, you may be able to

request that the TSP transfer all or part of your death benefit payment directly

to an "inherited" IRA. The I.R.C. allows individuals and, in some cases, trusts

(but not estates) to transfer death benefits to an inherited IRA. A trust must

satisfy the conditions specified in Treas. Reg. § 1.401(a) (9)-4, Q&A 5. An

inherited IRA is an IRA established specifi¬cally for the purpose of

transferring money inherited from a plan such as the TSP. Inherited IRAs may

provide significant tax benefits since the required distribution for the IRA can

generally be spread across the lifetime of the beneficiary. How¬ever, the rules

governing inherited IRAs are complicated, and there are restrictions. So before

you make a decision to transfer money from the TSP to such an IRA, we strongly

recommend that you discuss the details of your transfer with your tax advi¬sor

or your IRA provider. You may not roll over a TSP death benefit paid directly to

you into any type of IRA or plan.

If you choose to have the TSP transfer all or part of the pay¬ment to an

inherited IRA:

• Your transfer will not be taxed in the current year, and no income tax will

  be withheld.

• Your payment will be taxed when you withdraw it from the inherited IRA.

• The tax treatment and plan rules for withdrawals from the inherited IRA to

  which you transfer the distribu¬tion may be different from those of the

  TSP.

Ten-Year Tax Option

If the participant was born before January 2, 1936, you may be eligible to

calculate the amount of the tax on the death benefit payment by using the

10-year tax option, which will often reduce the tax you owe. To learn more, see

IRS Publica¬tion 575, Pension and Annuity Income, and IRS Form 4972, Tax on Lump

Sum Distributions.

Rules for Nonresident Aliens and Their Beneficiaries

Special tax withholding rules apply to payments the TSP makes to nonresident

aliens and beneficiaries of nonresident aliens. See the TSP tax notice "Tax

Treatment of Thrift Savings Plan Payments to Nonresident Aliens and Their

Beneficiaries."

Resources

Thrift Savings Plan publications are available from the TSP website, at

http://www.tsp.gov, or from the TSP by calling

the TSP toll free at 1-877-968-3778 (TDD: 1-877-847-4385). Outside the U.S. and

Canada, please call 404-233-4400 (not toll free). You can also send a fax to

1-866-817-5023 or write to the TSP at the address on the website.

Internal Revenue Service publications are available from your local IRS

office, on the IRS website at http;//www.irs.gov, or by calling

1-800-TAX-FORM.

Source: TSP-583 (11/2009)