One of the features of Federal Employee Benefits is their ability to continue to beneficiaries after the employee passes away. Two of the biggest retirement benefits a federal employee will have are their pension and Thrift Savings Plan (TSP). Each of these benefits carries an option to pass to a beneficiary, but the rules can be unique. Let’s explore more details about passing on each of these benefits below:

1. Thrift Savings Plan (TSP): The TSP allows employees to designate primary and contingent beneficiaries. Primary beneficiaries receive the TSP when the employee passes away, and contingent beneficiaries receive it if both the employee and the primary beneficiaries pass away. Often, an employee will list their spouse as a primary beneficiary and their kids as contingent beneficiaries. The TSP will pass into different accounts based on whether a spouse or non-spouse is listed as the beneficiary.

• Spouse: If a spouse is listed as a beneficiary, the account will pass into a new account known as a Beneficiary Participant Account (BPA). This allows the spouse to receive the TSP as if it were their own account, and all the same rules of the TSP apply. When the spouse passes, the BPA is distributed in full to the listed beneficiaries, often the kids, and could create a major tax burden for these individuals. This is why many federal employees choose to roll the TSP into an IRA prior to or at retirement to avoid this potential tax burden.
• Non-spouse: A non-spouse could include children, siblings, friends, or anyone besides a spouse. A non-spouse beneficiary cannot receive a beneficiary participant account and must roll the money into an inherited IRA or take a full distribution.

2. Federal pension: A federal employee can elect to reduce their monthly pension benefit in order for a portion of their pension to continue to a survivor for the remainder of the survivor’s life. Often, this will be either 50% or 25% of the benefit amount. The survivor option is primarily intended for spouses, but could go to non-spouses if there is proven financial dependence and approval is granted by the Office of Personnel Management (OPM).

Federal employees need to understand how their benefits will pass and factor the impact into their overall retirement plans. The advisors at SCO Wealth Management are familiar with the TSP beneficiary elections and pension survivor option and can show how these choices will impact your overall retirement. Please use us as a resource for your questions or schedule a complimentary review of your retirement plans.