This column discusses the required minimum distribution (RMD) rules that apply to a TSP beneficiary participant account holder.
A TSP beneficiary participant account holder is the spouse beneficiary of a deceased civilian or uniformed services participant. The RMD rules discussed in this column do not apply to a retired and separated civilian TSP participant or to a retired and separated uniform services account TSP participant. Those TSP RMD rules were discussed in another column.
What Are Required Minimum Distributions with Respect to a Beneficiary TSP Account?
The Internal Revenue Code requires that a TSP beneficiary participant begin receiving annual distributions from his or her beneficiary account within certain deadlines. The entire TSP beneficiary account balance – this includes the traditional TSP account and Roth TSP account balances – is subject to required minimum distributions (RMDs).
The TSP calculates any RMDs to be paid in the year of the TSP participant’s death using the deceased TSP participant’s age in the year of death, the prior year-end TSP account balance, and the IRS Uniform Lifetime Table (found in 2020 IRS Publication 590-B page 63 – www.irs.gov/pub/irs-pdf/p590b.pdf).
In the years following the deceased participant’s death, the TSP calculates the annual amount of the TSP beneficiary participant’s RMD using the beneficiary participant’s age, prior-year-end TSP account balance, and the IRS Single Life Expectancy Table (found in 2020 IRS Publication 590-B page 46, www.irs.gov/pub/irs-pdf/p590b.pdf).
When Do TSP Beneficiary Participants Need to Begin Receiving TSP RMDs?
It is important to understand that the IRS term “required beginning date” for a deceased TSP participant (the federal employee or annuitant who contributed to the TSP account) does not refer to the date that a beneficiary participant (the spouse of the deceased TSP participant) must begin receiving TSP RMDs. While the deceased TSP participant’s “required beginning date” is needed to determine the beneficiary participant’s “required beginning date’, the two dates are not necessarily the same dates.
As a result of the passage of the SECURE Act in December 2019, effective Jan.1, 2020, the deceased spouse’s required beginning date depends on whether the spouse was born before July 1,1949 or after June 30, 1949. If he or she was born before July 1, 1949, the required beginning date is April 1 of the year following the yar he or she reaches the age of 70.5 or separates from federal service, whichever is later. If he or she was born after June 30, 1949, the required beginning date is April 1 of the year following the year he or she reaches age 72 or separates from federal service, whichever is later. Throughout this column, it will be assumed that the deceased TSP participant was born after June 30, 1949.
Some examples will help illustrate:
Example 1. Ted was born on Oct. 1,1949 and retired from federal service on Dec. 31, 2014, at the age of 65. That makes Ted’s required beginning date April 1, 2022 because Ted will become age 72 on October 1, 2021. Ted also retired before October 1, 2021.
Example 2. Carol was born on Sept. 1,1949 and intends to retire from federal service on Dec. 31, 2023 at age 74. That makes Carol’s required beginning date April 1, 2024. In this case, it makes no difference that Carol becomes age 72 on Sept. 1,2021 because Carol will still be in federal service on September 1, 2021.
Example 3. William was born on Sept. 1,1949 and will retire from federal service on Jan. 3,2024 at age 74. That makes William’s required beginning date April 1, 2025.
Note that in examples 2 and 3 Carol and William were born on the same day (Sept. 1, 1949) and both will be in federal service on their 72nd birthday (Sept. 1, 2021). William has a required beginning date one year later than Carol’s required beginning date (April 1, 2025 versus April 1, 2024). This is because the required beginning date is April 1 of the year after separating from service or becoming age 72 if that was later, not the next April 1 to come along.
The date that the TSP beneficiary participant must begin receiving RMDs depends on whether the TSP participant) died before or on/after TSP participant’s required beginning date.
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TSP Participant’s Date of Death Is Before the Participant’s Required Beginning Date
The following table presents three possible scenarios with regard to when a TSP participant dies and the deadline by which the TSP beneficiary participant must begin receiving TSP RMDs. As a reminder, if the deceased TSP participant was born before July 1, 1949, age 70.5 should be substituted for age 72.
In the three scenarios described Table 1, the TSP beneficiary participant must continue to receive RMDs by December 31 of each subsequent year. The RMDs will be calculated each year by the TSP based on the TSP beneficiary participant’s age, not the deceased TSP participant’s age in each year had he or she lived. The following example illustrates:
Example 4. Barry, born Nov. 15, 1949, retired from federal service on Dec. 31, 2018. Barry named his wife Cindy as the sole beneficiary of his TSP account. Barry suddenly died on Dec. 20, 2019. Cindy then became a TSP beneficiary participant. Since Barry would have become age 72 on Nov. 15, 2021, Cindy must take her first TSP beneficiary participant RMD by Dec. 31, 2021. Cindy’s first year TSP RMD is calculated as follows:
TSP account balance as of Dec. 31, 2020 $750,000
Cindy’s Age in 2021 (70). IRS Single Life Expectancy (from IRS Single Life Table) 17.0
$750,000/17.0 = $44,118
TSP Participant’s Date of Death Is After the Participant’s Required Beginning Date
If a TSP participant dies after his or her required beginning date, then the deadline for the TSP beneficiary participant’s first RMD depends on whether the TSP participant satisfied the RMD in the year of death. The following table summarized the deadline for the TSP beneficiary’s first RMD:
The following examples illustrate:
Example 5. Jack, born November 1, 1949, was a retired federal employee with a TSP account. Jack died on June 1, 2021. Jack had previously had taken out his first year TSP RMD (2021, the year he would have become age 72) before he died. Jack’s wife, Sherry, who is the TSP beneficiary participant has until Dec. 31, 2022 to take her first TSP beneficiary participant RMD.
Example 6. Harriet, born Sept. 1, 1949, was a retired federal employee with a TSP account. Harried died on July 15, 2021. Harriet had not taken her first year TSP RMD for 2021 (the year she would have become age 72) before she died. Harriet’s husband Richard is Harriet’s TSP beneficiary participant. Richard must take Harriet’s first year TSP RMD no later than Dec. 31, 2021.
In both examples the TSP beneficiary participant (Sherry and Richard, respectively) will need to receive an RMD based on their age – not their deceased spouse’s age – in each subsequent year.
How TSP Beneficiary RMDs Are Received
In the beginning of each year, the TSP will send correspondence to each TSP beneficiary participant, notifying the beneficiary participant what their TSP RMD is for that year. The TSP participant’s RMD may be fully or partly satisfied by any withdrawals the TSP beneficiary participant chooses to make. If the TSP beneficiary participant does not make any withdrawals, or if the TSP beneficiary participant’s withdrawals fall short of the required RMD amount for that year, the TSP will automatically send in December the TSP beneficiary participant the amount that is still required for that year.
Other Items Related to TSP Beneficiary RMDs
• Transfer of TSP beneficiary participant RMD to an IRA or to an eligible retirement plan. A TSP beneficiary participant’s RMD cannot be transferred to an IRA or to an eligible retirement plan such as a 401(k)-retirement plan.
• Federal income tax withholding from a TSP beneficiary participant’s RMD. With one exception, RMDs are in the IRS category of “non-periodic payments”. The TSP must withhold 10 percent federal income tax unless the TSP receives other instructions from the TSP beneficiary participant. A participant can instruct the TSP to waive federal income tax withholding or to withhold more than 10 percent. They may do so by submitting IRS Form W4-P (Withholding Certificate for Pension or Annuity Payments). Note that the TSP does not withhold for state income taxes for TSP beneficiary participants who are residents of state with state and local income taxes. The TSP beneficiary participant is responsible for making arrangements to pay any state and local income taxes due upon the TSP beneficiary participant withdrawals.