Have you thought about (or researched) what will happen to your Thrift Savings Plan (TSP) when you're no longer around? I know...you're invincible. No reason to worry about that.

Well, while I'm a pretty big fan of TSP I'm not all that "jazzed" with the estate planning ramifications associated with holding TSP for the entirety of your life. You may want to put just a little bit of brain-power on the question of what happens to your TSP account when it's not yours anymore. Here is a primer on what will happen if you don't do anything.

Beneficiary Succession. This one shouldn't be a concern as long as you keep your beneficiary designations up to date. But, if life gets in the way and your designated beneficiary passes away before you and you haven't named contingent beneficiaries you might be surprised with what happens. Unlike a 401(k) or IRA the account won't automatically go to your estate for further distribution. The Federal Government will distribute your money in the following order (100% to the first surviving entity), which may be something you want or don't want.

1. To Your Spouse
2. To your child or children equally, and descendants of deceased children by representation
3. To your parents equally or to the surviving parent
4. To your appointed executor or administrator of your estate
5. To your next of kin who is entitled to your estate under the laws of the state in which you resided at the time of your death

Spouse Inherits TSP. If your spouse is named as your beneficiary and you pass away first, the balance of your account will automatically (upon notification of your passing) be transferred to a Beneficiary Account and automatically be 100% invested in the G Fund. The balance will remain 100% invested in the G Fund until the beneficiary reallocates the funds into a combination of the other available TSP asset classes.

Non-Spouse Inherits TSP. A non-spouse beneficiary cannot leave funds in TSP. The beneficiary or beneficiaries will either be paid directly or can direct that the funds be deposited in an inherited IRA. As with all inherited IRAs the owner cannot make contributions to or roll funds into the account

Owner of a Beneficiary Account Passes Away. This is the one that bothers me the most. Unlike an IRA or 401(k) the balance of a deceased beneficiary's account must be paid out immediately. It cannot be rolled to an IRA or other tax sheltered account. So...if your surviving beneficiary still had significant funds in TSP upon passing the entire amount will be paid out to his or her designated beneficiaries. The entire amount of the received will be taxed as ordinary income. This could push the recipient into a higher tax bracket and cause them to lose several credits or deductions. It is certainly possible that the payout could be taxed at near 50%. If payout was not forced in a single year, like an IRA, then the recipient of the remaining TSP balance could "stretch" out the payments over his or her lifetime and potentially pay significantly less in taxes.

Again, overall I like TSP. In most cases, I recommend that clients keep their TSP accounts open and remain invested there. But as distributions begin and the possibility of someone inheriting a TSP balance becomes more real it is certainly worth considering whether a move from TSP (most likely to an IRA) is right for you.

After years of accumulating assets, the time will come for you to begin drawing on those assets to provide income throughout retirement. Before that day arrives, be sure to consider some steps to assist you in keeping your retirement income stream flowing.

Set a Sustainable Withdrawal Rate

As tax-advantaged retirement savings vehicles such as 401(k)s and IRAs have proliferated, so too has the trend toward self-funding of retirement. In the future, the share of personal assets required to fund retirement is sure to grow, which makes knowing how much you can withdraw from your investment accounts each year -- and still maintain a healthy cushion against uncertain market and personal circumstances -- a necessity to any retirement income plan.

A number of factors will influence your choice of withdrawal rates. These include your longevity, the potential impact of inflation on your assets, and the variability of investment returns. Therefore, when crafting a retirement asset allocation, a key question will be how much to allocate to stocks. (1) Certainly you will want to maintain enough growth potential to protect against inflation, yet you will also need to be wary of being too exposed to stock market gyrations. Generally speaking, those who have planned well and amassed enough assets to comfortably finance retirement may be in a better position to include more stocks in their portfolios than those who enter retirement with less.

Developing a Withdrawal Rate

The goal of your withdrawal plan is to crack your nest egg in such a way as to provide a reliable stream of income for as long as you live. The question is, "How much can I plan to withdraw each year without depleting my financial resources?" Academic studies suggest a yearly withdrawal rate of 3% to 4% of your portfolio's value based on an asset allocation of 60% stocks and 40% cash and fixed-income investments. (2) By staying within this withdrawal range you potentially should be able to maintain your portfolio's value in real, inflation-adjusted terms for an extended period of years, although past performance is no guarantee of future results.

Tax Rules Affecting Retirement Account Withdrawals

IRA and other retirement plan owners may be subject to a 10% income tax penalty if withdrawals begin before age 59½. Also, mandatory withdrawals, called "required minimum distributions" or "RMDs," must begin by age 70½. Failure to take full RMDs may result in a penalty tax of 50% of the required distribution amount.

Consult with your tax and/or financial advisor for additional help analyzing your specific situation. You should also revisit your personal withdrawal strategy each year, as your situation and tax laws may change.

Source/Disclaimer:

1 Asset allocation does not assure a profit or protect against a loss. Investing in stocks involves risks, including loss of principal.

2 This example is hypothetical and not intended as investment advice. Your results will vary.

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