What is an Inherited IRA and TSP?


An Individual Retirement Account and a Thrift Savings Plan represent two investment accounts that are open and available to federal employees. These accounts eliminate income tax on money inside of the account. The investments you choose determine the actual rate of return and, ultimately, the amount of savings in the plan. However, you should understand what happens when your heirs inherit these funds.


IRAs are retirement accounts that are separate from employer-based retirement plans. These plans do not require that you make contributions to the account through an employer. A TSP is a retirement plan that is part of the Federal Employees Retirement System. It is a defined contribution plan where you make contributions to the plan from your paycheck through your employer. Inherited IRA and TSP accounts are investment accounts passed along to a beneficiary. A spouse or child may receive these accounts when you pass away. All of the money in the account goes to the spouse or child. This money represents unused retirement savings.


The money in the account which is passed to a spouse may be treated as her own retirement account. She may make contributions to the IRA portion of the inheritance, manage funds in both investment accounts and make withdrawals at or before retirement without any withdrawal penalties. All non-spouse beneficiaries must begin taking beneficiary payments from the retirement plan as soon as you die. These payments are either spread out over the beneficiary's lifetime, over a five year period or taken as a lump sum.


The benefit of inheriting an IRA is that your beneficiaries receive money that they can use to fund their own retirement. This money helps them get a head start on their retirement, thus securing their financial future. If you die prior to retirement, this also means that your heirs are not left financially stranded with no means to pay ordinary bills and expenses. They can withdraw retirement funds early without incurring a penalty from the IRS for early withdrawals.


You should consider using life insurance to pass along your inheritance. A life insurance policy can be purchased with a portion of your retirement assets. The advantage of life insurance is that it only takes a fraction of your savings to fund, and provides as much as, or more than, your total retirement savings at your death. In addition, the death benefit is income tax-free to your heirs.

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