When a federal employee passes away, their spouse may be eligible for important benefits. These include survivor benefits from the Federal Employees Retirement System (FERS) and access to the deceased employee’s Thrift Savings Plan (TSP) account. While these benefits can provide financial support, they can also be complex, especially regarding taxes. This article aims to explain these benefits in simple terms.
FERS Survivor Benefits
FERS is the retirement plan for most federal workers. If a federal employee dies after working enough years for the government, their surviving spouse may receive a survivor benefit. This benefit is typically 50% of the employee’s FERS pension.
There are different types of FERS, such as FERS, FERS-RAE, and FERS-FRAE. While there are some differences between these plans, they all provide a pension that continues to the spouse after the employee’s death.
Thrift Savings Plan (TSP)
The TSP is similar to a 401(k) for federal employees. It’s a way for them to save for retirement. When a federal employee dies, their TSP account typically passes to their spouse or named beneficiary.
TSP accounts can have two types of investments:
- Pre-tax: The employee didn’t pay taxes on this money when it was put into the account. Taxes are paid when the money is withdrawn later.
- Roth TSP: The employee already paid taxes on this money when it was contributed. When withdrawn later, it’s tax-free.
If the TSP money is pre-tax, the spouse will need to pay taxes when they withdraw it. However, there are ways to transfer this money to an IRA without paying taxes right away, such as moving it to an inherited IRA. It’s important to use the word “transfer” instead of “rollover” to avoid potential issues.
Tax Considerations
Some survivor benefits and TSP funds will be taxable, while others may be tax-free. The Office of Personnel Management (OPM) calculates how much is taxable and sends a form called the 1099-R. This form shows how much money was paid out and how much is taxable.
When withdrawing money from the TSP or other accounts, it’s crucial to understand the tax consequences. Knowing how much will be taxed and how much will not can help with financial planning.
Required Minimum Distributions (RMDs)
Under the Secure Act 2.0, when a spouse inherits a TSP account, they don’t have to take Required Minimum Distributions (RMDs) until the spouse would have turned 73 years old. If the spouse was already taking RMDs upon death, then the survivor spouse would have to continue taking RMDs out of that account. RMDs are mandatory withdrawals from retirement accounts. The rules for RMDs can be complex, so it’s important to understand when withdrawals must begin.
Key Terms to Know
- FERS: Federal Employees Retirement System
- Survivor Benefit: The amount a spouse receives after their federal employee partner passes away
- TSP: Thrift Savings Plan – the federal retirement savings plan
- Pre-tax: Money saved before taxes are taken out, meaning it’s taxed later
- Roth TSP: Money saved after taxes, meaning it’s not taxed when withdrawn
- Inherited IRA: A type of retirement account where money is transferred after someone’s death
- RMD: Required Minimum Distribution – the amount of money that must be withdrawn from a retirement account after a certain age
Conclusion
Losing a loved one is difficult, and understanding federal benefits and taxes can make it even more challenging. FERS survivor benefits can provide ongoing income, and the TSP account will be passed on to the spouse or beneficiary. However, taxes play a significant role in these benefits.
It’s important for surviving spouses to understand their options and the tax implications of different choices. While this article provides an overview, the rules and regulations can be complex. For specific questions or more detailed information, it’s advisable to consult OPM.gov or speak with a financial advisor familiar with federal retirement benefits.
ABOUT THE AUTHOR
Micah Shilanski, CFP®, is a distinguished financial planner known for his deep commitment to providing exceptional advisory services to his clients. As the founder of Plan Your Federal Retirement, Micah has dedicated his career to helping federal employees understand and optimize their benefits to ensure a secure and prosperous retirement. His expertise is widely recognized in the industry, making him a sought-after speaker and educator on financial planning and retirement strategies.
Micah’s approach is client-centered, focusing on creating personalized strategies that address each individual’s unique needs. His work emphasizes the importance of comprehensive planning, incorporating aspects of tax strategy, investment management, and risk assessment to guide clients toward achieving their financial goals.Micah Shilanski 00:05
It is not only important to know how your benefits work, but your spouse needs to understand how those benefits work, God forbid, but when you pass away for information like that, stay tuned for this FERS Federal Fact Check. Hi, I am Micah Shilanski with Plan Your Federal Retirement. Today, we have a question that comes in from Mark about his wife that passed away, and Mark again, before I get to my condolences on your wife passing something that’s really challenging to deal with, and then on top of that, you have to deal with some complications with the federal benefits, understanding how the process works. Let’s go ahead and take a peek at Mark’s question. I need help with my federal employee survivor benefits. I’m looking for help with my wife’s survivor FERS death benefits. She worked as a federal employee and was working when she passed after a death, I met with the employer to fill out the paperwork gain access to the TSP and FERS account to make decisions regarding her death benefit that would be paid out. I don’t understand the tax rules of FERS and the death benefit funds. So I’m looking for some guidance. My wife passed away in February, and after nine months, I was finally given access to her TSP account. Her FERS death benefits are still being processed by OPM. Mark, again, my condolences on the passing of your wife and then having to deal with this complex system and the delays that it takes you ask some really good questions right here, especially, I won’t get into too much on how the benefits work, I’m going to talk about your question on the tax side of it, and we have a lot of videos out there on our website that talk about taxes and the tax buckets, that’s another great one for probably you to reference. The TSP, but again, I’m not looking at her TSP, so I speak generically, more than likely was invested in a pre tax account. There’s two things you can invest in TSP you can invest in, pre-tax, or in the Roth. The Roth, when we put money into a Roth TSP or Roth IRA account, we put in money after taxes. What does that mean? That means we have no tax deduction for the contribution, but anything that money grows to is 100% tax free, so it’s kind of a nice benefit. Now the opposite side is going to be the pre tax money. That’s where we put money into our TSP pre-tax, that means we got a tax deduction today, but anything that money grows to in the future is 100% taxable, more than likely, that’s where some, if not all, of the money that she was contributing went into her TSP account. So if the money is pre-tax, that means when you pull it out, you have to pay taxes on that money. Mark, please be really careful in how you do this, there’s ways you can transfer the money from a TSP to an inherited IRA account, which will result in no taxes, you cannot do a rollover be really careful, I’m not gonna spend a lot of time on this video talking about it, there’s no such thing as a spousal rollover, and it really can create some tax issues for you, so transfer is the word that you want to use when you’re looking at potentially moving money from the TSP. As you as a spouse are inheriting that money, now we’re under Secure Act 2.0 under Secure Act 2.0 is you and the spouse is inheriting that money. Be careful on how those RMDs Required Minimum Distribution work. You don’t have those until you or your spouse, potentially, on how the account is set up, would have been RMD age, which is 73 years young to 75 depending on when you and her were born, so some things to think about with that. Now, another thing you talk about the FERS benefits, when the FERS benefits get paid, presumably you were left as her beneficiary. The way that it works is that if she had enough years of federal service, you will be paid out a full survivor benefit, which is 50% is the full Survivor Benefit, again, the way that this contribution works, now, I don’t know if she’s under FERS, FERS RAE, FERS FRAE, but basically she put in a little bit of money post task. Most of the money it was put into her FERS pension is from the employer which you were never paid taxes on, so it’s going to be a combination. Some of that money is going to come out tax free, some of that money is going to come out taxable, the vast majority is going to come out taxable to you. Good news Mark, you don’t have to calculate that OPM will calculate that for you on your 1099-R which is a retirement statement you’re going to get from OPM every year, and it’s going to say the gross amount, also going to have the taxable amount on there as well, so you’re going to have that information. So really important to understand, especially before you start moving money, taking money out of the TSP or IRA accounts, etc, understand the tax consequences, so Mark, I’m really glad that you’re reaching out and asking this question. It’s kind of a bit of a generic answer because I don’t know, really all the details, that’s going on, make sure you understand that. If you have more questions like this to make sure you jump on our website, and you can be featured in our next FERS Federal Fact Check, till then Happy Planning!