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swirv  
#1 Posted : Monday, February 13, 2012 8:16:06 PM(UTC)
swirv

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My  father passed away last month, and he split his TSP up between myself brother and mother.   Since TSP was never taxed we would have to pay taxes on it.  My brother and I are not allowed to roll over in our TSP's (both work for govt).  So the choice is pay 20% tax or do an inherited IRA. 
 
Is there any advice on the inherited IRA?  This is what I found reading so far.
 

If you choose to have the TSP transfer all or part of the payment 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 distribution may be different from those of the TSP.

Can we space this out over several years and not get taxed the full 20%?

swirv  
#2 Posted : Monday, February 13, 2012 8:22:34 PM(UTC)
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I wonder if its taxed based on the initial payment amount, or however much its worth when you ca***** in.

 

For example.  Say we get $10k.  If we take the 20% hit now, we end up with $8k and can roll it over into whatever we want - probably a tax free IRA (upon withdrawal).  So that $8k is ours plus whatever it makes for its duration.  (I think that's how it works).

 

But, if we get $10k and keep it in the inherited IRA, say by the time we ca***** in, it doubles to $20k - we are taxed on 20% of the 20K - or we get to keep $16k...  We have the higher principal to earn interest off of now, but we are taxed on the full amount (at 20%) when we ca***** in.  Although, if we wait until we stop earning as much money (post retirement), then maybe the tax rate will be less?

 
 

Edited to add for some reason i can spell out c a s h i t in with a bunch of asteriks showing up.
swirv2012-02-14 04:30:03
Fed1969  
#3 Posted : Monday, February 13, 2012 8:29:22 PM(UTC)
Fed1969

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swirv wrote:

I wonder if its taxed based on the initial payment amount, or however much its worth when you ca***** in.

 

For example.  Say we get $10k.  If we take the 20% hit now, we end up with $8k and can roll it over into whatever we want - probably a tax free IRA (upon withdrawal).  So that $8k is ours plus whatever it makes for its duration.  (I think that's how it works).

 

But, if we get $10k and keep it in the inherited IRA, say by the time we ca***** in, it doubles to $20k - we are taxed on 20% of the 20K - or we get to keep $16k...  We have the higher principal to earn interest off of now, but we are taxed on the full amount (at 20%) when we ca***** in.  Although, if we wait until we stop earning as much money (post retirement), then maybe the tax rate will be less?

 
 

Edited to add for some reason i can spell out c a s h i t in with a bunch of asteriks showing up.

Direct  rollovers avoid withholding tax.  The actual tax is determined when you file your tax return.  It is basically your marginal tax rate.
edalder  
#4 Posted : Monday, February 13, 2012 9:47:07 PM(UTC)
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If you roll over your share of the TSP to an inherited IRA, you will not owe any taxes immediately. Beginning in the year following the year of death, you will have to take at least a Required Minimum Distribution based upon your life expectancy.

For the sake of argument let's suppose you inherited $30,000 and and that was the value of your inherited IRA as of 12/31 of the year of death. Let's also say for the sake of argument that your life expectancy is 30 years. By 12/31 of the following year, you have to withdraw $1000. $30000 / 30 years. It is the value of the IRA as of 12/31 of the previous year, not it's actual value at the time of the withdrawal. This amount is taxable income to you and you will get a 1099, but you will not owe any 10% early withdrawal penalty.

The next year, your life expectancy is 29 years and you repeat the process based upon the account value as of the previous 12/31. Maybe, despite of your withdrawal, the account has done well and was worth 32k on 12/31 of the previous year. $32,000 / 29 = $1105 (rounded up to the nearest dollar). That's the minimum that you have to take out. The next year your life expectancy is 28 years and maybe the account has not done well and gone down to 28k. You are back to taking out $1000.

I do have one of these and have been taking these RMD's now for nine years. I started out with a life expectancy of 29.5 years. My account actually is worth slightly more now than when I got it, but eventually my life expectancy is going to get low enough that I will have to start taking out fairly substantial amounts. At some point, the funds remaining in the account may be so little that I will just say, the heck with it and close it out.

I would have your IRA custodian compute your first withdrawal and tell you what life expectancy figure it used. Thereafter, just reduce it by one year each for every subsequent withdrawal. I do think that you have to use a particular life expectancy table and you are stuck with the table for the life of the inherited IRA.

Of course, you always can take out more than the RMD. You just cannot take less.

It does stretch out the tax burden. I have never had to take out an amount that would have thrown me into a higher marginal tax bracket. I inherited roughly 29k and my inherited IRA is now worth about 32k in spite of those nine withdrawals. I think the most that I had to take in any one year was $1600.

Your mileage may vary and if the amount that you inherit is substantially more than 29k, then you obviously will have to take out more each year.








Kivi
Fed1969  
#5 Posted : Monday, February 13, 2012 11:53:42 PM(UTC)
Fed1969

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edalder wrote:
If you roll over your share of the TSP to an inherited IRA, you will not owe any taxes immediately. Beginning in the year following the year of death, you will have to take at least a Required Minimum Distribution based upon your life expectancy.

For the sake of argument let's suppose you inherited $30,000 and and that was the value of your inherited IRA as of 12/31 of the year of death. Let's also say for the sake of argument that your life expectancy is 30 years. By 12/31 of the following year, you have to withdraw $1000. $30000 / 30 years. It is the value of the IRA as of 12/31 of the previous year, not it's actual value at the time of the withdrawal. This amount is taxable income to you and you will get a 1099, but you will not owe any 10% early withdrawal penalty.

The next year, your life expectancy is 29 years and you repeat the process based upon the account value as of the previous 12/31. Maybe, despite of your withdrawal, the account has done well and was worth 32k on 12/31 of the previous year. $32,000 / 29 = $1105 (rounded up to the nearest dollar). That's the minimum that you have to take out. The next year your life expectancy is 28 years and maybe the account has not done well and gone down to 28k. You are back to taking out $1000.

I do have one of these and have been taking these RMD's now for nine years. I started out with a life expectancy of 29.5 years. My account actually is worth slightly more now than when I got it, but eventually my life expectancy is going to get low enough that I will have to start taking out fairly substantial amounts. At some point, the funds remaining in the account may be so little that I will just say, the heck with it and close it out.

I would have your IRA custodian compute your first withdrawal and tell you what life expectancy figure it used. Thereafter, just reduce it by one year each for every subsequent withdrawal. I do think that you have to use a particular life expectancy table and you are stuck with the table for the life of the inherited IRA.

Of course, you always can take out more than the RMD. You just cannot take less.

It does stretch out the tax burden. I have never had to take out an amount that would have thrown me into a higher marginal tax bracket. I inherited roughly 29k and my inherited IRA is now worth about 32k in spite of those nine withdrawals. I think the most that I had to take in any one year was $1600.

Your mileage may vary and if the amount that you inherit is substantially more than 29k, then you obviously will have to take out more each year.









Thank you for the details.
swirv  
#6 Posted : Tuesday, February 14, 2012 12:14:20 AM(UTC)
swirv

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Great information there, I truly appreciate it. 
Any idea if I get to pick the IRA account (IE I already do Roth IRA's and have other money with T.RowePrice), can I use one of their funds to do my Inheritance IRA?
edalder  
#7 Posted : Tuesday, February 14, 2012 7:56:14 AM(UTC)
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I actually inherited an IRA as my late father was not a Federal employee. However, I did not particularly care for the firm that had his account. I was able to roll it over to Vanguard without any problem whatsoever.
 
I cannot see it being any different with your share of your father's TSP. Just call up the firm that you would like to use and inquire about any special requirements. Call up the TSP and inquire about any forms they may require. It's been nine years, but I do not remember the process as being particularly difficult or challenging.
 
These accounts do have to be set to show that you are the beneficiary of an inherited IRA. There is a special way it has to read. But, as long as you do a custodian to custodian transfer and make it clear that this to the new custodian that this accout is to be set up as an an inherited IRA, you should be OK.
 
I actually have an Outlook reminder for November 1st of each to compute and make the required withdrawal.  You do have to make the withdrawal by the end of the calendar year, not by when your tax return is due.
 
edalder2012-02-14 16:01:50
Kivi
edalder  
#8 Posted : Tuesday, February 14, 2012 8:00:51 AM(UTC)
edalder

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BTW, once the money gets to the new account, you can invest in any funds offered by the custodian, whether it's Vanguard, Fidelity or T Rowe, Price. No problem there.
Kivi
Knight  
#9 Posted : Tuesday, February 14, 2012 11:26:23 PM(UTC)
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How much are you putting in your TSP? If you start pulling this money you can potentually add more to your own nest egg for the future. Please don't blow it. But then it is yours to do with as you see fit.
swirv  
#10 Posted : Tuesday, February 21, 2012 8:21:53 PM(UTC)
swirv

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Right now I'm doing 5% in TSP, and do the 5k in a Roth IRA, Have been working for federal govt for 7 yrs, and have been contributing this way the entire time (well roth's use to be 4k I believe).
 
 
Not retiring yet  
#11 Posted : Sunday, February 26, 2012 11:56:10 AM(UTC)
Not retiring yet

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This might not help.   but, information is from TSP  pages    

Death Benefits: Payment of Death Benefits

Resources

Forms:

  • TSP-3, Designation of Beneficiary
  • TSP-17, Information Relating to Deceased Participant

Need Help?
Call the toll-free ThriftLine at 1-877-968-3778 and speak to a Participant Service Representative.

For calls outside the U.S. and Canada call 1-404-233-4400 (not a toll-free number).

The ThriftLine hours are Monday through Friday, 7 a.m. to 9 p.m., Eastern time.

Death benefit payments made from your beneficiary participant account must be paid directly to your beneficiary(ies). These payments are subject to certain tax restrictions and cannot be transferred or rolled over into an IRA or eligible employer plan. In addition, the payment will be fully taxable in the year your beneficiary(ies) receive it.

For detailed information about the rules associated with death benefit payments, read the TSP tax notice “Important Tax Information About Thrift Savings Plan Death Benefit Payments.”PDF document You may also want to consult a tax advisor.

In order for your beneficiaries to receive your account balance after your death, they (or their representatives) must complete the Form TSP-17PDF document, Information Relating to Deceased Participant and send it to the TSP along with a copy of the certified death certificate. Once the TSP processes this information and determines the beneficiaries for your account, we will contact them with additional information and instructions.

dmaceld  
#12 Posted : Monday, February 27, 2012 3:44:24 AM(UTC)
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swirv wrote:
My  father passed away last month, and he split his TSP up between myself brother and mother.   Since TSP was never taxed we would have to pay taxes on it.  My brother and I are not allowed to roll over in our TSP's (both work for govt).  So the choice is pay 20% tax or do an inherited IRA. 
 

Is there any advice on the inherited IRA?  This is what I found reading so far.

Maybe you're already aware of this from the previous comments and your research. You MUST move the TSP account to the inherited IRA via a custodian to custodian transfer so make sure the receiving account has been completely set up first. If you get the money issued directly to you, you are screwed. There is no way to move it into an inherited IRA. How much time after your father's death to accomplish this I don't know. I don't find it in a search through a couple of TSP pubs, but we can be sure it is not indefinite!

I'm sure you're aware your mother can keep her portion in the TSP. That is change made only a few years ago. It's too bad your father didn't leave it all to your mother and then you would have inherited what was remaining eventually, but I'm sure he had his reasons.

I wonder if there is anyway to voluntarily revoke your beneficiary right to collect, letting your mother have it, if you even wanted to consider that option?


dmaceld2012-02-27 11:54:48
Fed1969  
#13 Posted : Monday, February 27, 2012 4:16:52 AM(UTC)
Fed1969

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dmaceld wrote:


swirv wrote:
My  father passed away last month, and he split his TSP up between myself brother and mother.   Since TSP was never taxed we would have to pay taxes on it.  My brother and I are not allowed to roll over in our TSP's (both work for govt).  So the choice is pay 20% tax or do an inherited IRA. 
 

Is there any advice on the inherited IRA?  This is what I found reading so far.

Maybe you're already aware of this from the previous comments and your research. You MUST move the TSP account to the inherited IRA via a custodian to custodian transfer so make sure the receiving account has been completely set up first. If you get the money issued directly to you, you are screwed. There is no way to move it into an inherited IRA. How much time after your father's death to accomplish this I don't know. I don't find it in a search through a couple of TSP pubs, but we can be sure it is not indefinite!

I'm sure you're aware your mother can keep her portion in the TSP. That is change made only a few years ago. It's too bad your father didn't leave it all to your mother and then you would have inherited what was remaining eventually, but I'm sure he had his reasons.

I wonder if there is anyway to voluntarily revoke your beneficiary right to collect, letting your mother have it, if you even wanted to consider that option?



The government makes the rules so complicated.
swirv  
#14 Posted : Sunday, March 11, 2012 8:30:04 PM(UTC)
swirv

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Finally received all the forms today, and I have 60 days to choose where I want to put the money.  Thinking about something failry safe like GNMA from Trowprice.  Right around 6.5% a yr, an didnt take a huge hit in 2008.
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