How Is the Federal TSP Taxed When You Inherit It? (w/Examples) + FAQs

This article reflects federal rules and general state rules as of June 2026 and covers tax years 2025 and 2026. Tax law changes — confirm current figures with IRS.gov and your state tax agency before you file.

Quick Answer

A traditional TSP you inherit is taxed as ordinary income when you withdraw it; an inherited Roth TSP comes out tax-free if the 5-year rule is met. A surviving spouse can defer tax for years. Most non-spouse heirs must empty the account within 10 years, paying income tax on every traditional dollar.

A federal Thrift Savings Plan (TSP) does not get a “stepped-up basis” the way a house or stocks do. The pre-tax money inside a traditional TSP was never taxed during the original owner’s life, so the government collects that tax from you, the heir, the moment the money leaves the account. Miss a withdrawal deadline and the penalty can reach 25% of the amount you should have taken.

Roughly 7.2 million people hold TSP accounts worth over $900 billion in TSP assets, which means a large and growing wave of these accounts will pass to spouses, children, and other heirs over the next two decades. The rules changed sharply after the SECURE Act, and the IRS finalized the RMD regulations in July 2024, with most provisions binding for 2025 and later. Get the choice right and you can stretch the tax bill over years; get it wrong and you can hand a third of the account to the IRS in a single April.

Here is what you will learn:

💵 How a traditional inherited TSP is taxed versus a Roth inherited TSP, dollar for dollar.
👫 Why a surviving spouse has options no other heir gets — and which one saves the most.
⏳ How the 10-year rule and annual RMDs work for children and other non-spouse heirs.
🧮 Worked examples with real numbers so you can copy the math for your own situation.
🚫 The seven mistakes that trigger the 25% penalty, double taxation, or a needless tax spike.

What “Inheriting a TSP” Actually Means

The Thrift Savings Plan is the federal government’s version of a 401(k) for civil servants and military members. When the account owner dies, the money goes to whoever is named on the beneficiary form — not to whoever is named in a will or trust. The Federal Retirement Thrift Investment Board (FRTIB) runs the plan, and it follows the beneficiary designation first and a fixed legal order second.

A TSP can hold two kinds of money, and they are taxed in opposite ways. Traditional TSP money went in before tax, so every dollar that comes out is taxed as ordinary income. Roth TSP money went in after tax, so qualified withdrawals come out completely tax-free. One inherited account can contain both buckets, and the TSP tracks and pays them separately.

If the owner named no beneficiary, the TSP follows a standard order of precedence: surviving spouse first, then children in equal shares, then parents, then the estate, then next of kin under state intestacy law. This matters for tax because an account that lands in the estate loses the favorable spousal and individual options and is usually forced out fast — often within five years — at the estate’s high compressed tax rates.

The single biggest fork in the road is your relationship to the deceased. A surviving spouse, a non-spouse individual (like an adult child), and a non-person beneficiary (like a trust or the estate) each face a different rulebook. The rest of this guide walks each path with the math.

Which Situation Applies to You?

Your tax outcome depends almost entirely on who you are to the person who died and what kind of TSP money you inherited. Find your row below, then read the matching section.

You are the surviving spouse → You can take ownership through a Beneficiary Participant Account (BPA), roll to an inherited IRA, or cash out. See “Surviving Spouse Rules.”
You are a non-spouse individual (child, sibling, friend, partner) → You generally face the 10-year rule and a forced lump sum if you do nothing. See “Non-Spouse Beneficiary Rules.”
You are an “eligible designated beneficiary” (minor child of the owner, disabled or chronically ill person, or someone not more than 10 years younger than the owner) → You may stretch withdrawals over your life expectancy. See “Eligible Designated Beneficiaries.”
The beneficiary is a trust, estate, or charity → Special and usually less favorable rules apply, often a 5-year payout. See “Trusts, Estates, and Non-Person Heirs.”
You inherited a Roth TSP → Read your relationship section and the “Inherited Roth TSP” section, because the tax treatment flips.

Surviving Spouse Rules: The Most Flexible Path

A surviving spouse has the widest set of choices, and the choice drives the tax bill for years. When a spouse is the beneficiary, the TSP creates a Beneficiary Participant Account (BPA) in the spouse’s name, holding the inherited money inside the TSP. The spouse can keep that BPA, move the money to an inherited IRA, roll it into their own retirement account, or take the cash.

Keeping the Beneficiary Participant Account (BPA)

The BPA lets a surviving spouse leave the money invested inside the TSP and defer income tax until withdrawal. Traditional BPA money is taxed as ordinary income only as it comes out, and the spouse generally takes required minimum distributions (RMDs) based on their own life expectancy once RMD age is reached. Under SECURE 2.0, the RMD age is 73 for those born 1951–1959 and 75 for those born in 1960 or later.

The consequence of keeping a BPA shows up at the second death. When the surviving spouse dies, money left in a BPA cannot be passed to another beneficiary as an inherited account and cannot be rolled over — it must be paid out, often as a fully taxable lump sum to the next heir. A common misconception is that a BPA “passes on like an IRA.” It does not. The fix: a spouse who wants to leave the money to children should roll the BPA into their own IRA so the next generation gets the standard inherited-IRA treatment.

Rolling to the Spouse’s Own IRA or Inherited IRA

A surviving spouse can also move the money out of the TSP entirely. Rolling traditional TSP funds directly to a traditional IRA is tax-free at the time of the move; tax is owed later as the spouse withdraws. The direct rollover matters because if the TSP cuts a check to the spouse instead, 20% mandatory withholding applies and the full amount can become taxable if not redeposited within 60 days.

Treating the money as the spouse’s own IRA usually delays RMDs the longest and gives the cleanest path to name new beneficiaries. The trade-off: money in the spouse’s own IRA is subject to the 10% early-withdrawal penalty before age 59½, while money kept in a BPA or inherited IRA is not hit with that penalty regardless of the heir’s age. A widow under 59½ who needs cash should think twice before rolling to her own IRA.

Non-Spouse Beneficiary Rules: The 10-Year Clock

A non-spouse beneficiary — most often an adult child — faces a tighter and more expensive set of rules. The TSP does not let a non-spouse keep the money inside the plan. The plan places the inherited share in a temporary account, and the non-spouse must either move it to an inherited (“death”) IRA or take the cash.

The Forced Lump Sum Trap

If a non-spouse does nothing, the TSP automatically pays a lump sum after about 90 days. For a traditional account, that entire lump sum lands on the heir’s tax return in a single year. A $500,000 traditional balance paid as one lump sum can push an heir from the 22% bracket into the 35% bracket and cost far more tax than a spread-out plan would. The fix is to request a direct transfer to an inherited IRA before the 90-day clock runs out.

The 10-Year Rule

Once the money is in an inherited IRA, the 10-year rule governs most non-spouse heirs. The entire inherited IRA must be emptied by December 31 of the 10th year after the year of death. For a traditional inherited IRA, when the original owner had already reached RMD age, the heir must also take an annual RMD in years 1 through 9, then empty the rest in year 10. These annual RMDs became enforceable starting in 2025 under the final regulations.

The consequence of missing a yearly RMD is a penalty. SECURE 2.0 cut the old 50% excise tax to 25%, dropping to 10% if you fix the shortfall within the correction window. A common misconception is that you can ignore years 1 through 9 and just take everything in year 10 — that is only true if the original owner died before their required beginning date. The fix: confirm whether the deceased had started RMDs, then calendar each annual withdrawal.

Eligible Designated Beneficiaries: The Stretch Survivors

A small group of heirs escapes the 10-year rule and may “stretch” withdrawals over their own life expectancy. The IRS calls them eligible designated beneficiaries (EDBs), and the SECURE Act defines five categories: the surviving spouse, a minor child of the account owner, a disabled individual, a chronically ill individual, and any individual not more than 10 years younger than the deceased.

The benefit is real money. Stretching withdrawals over a 30- or 40-year life expectancy keeps each year’s taxable income small and lets the rest grow tax-deferred. The catch for a minor child: the stretch ends at age 21, after which the 10-year clock starts, so the account must be emptied by age 31. A common misconception is that any minor qualifies — only the owner’s own minor child does, not a grandchild.

Trusts, Estates, and Non-Person Heirs

When the beneficiary is the estate, a charity, or a non-qualifying trust, the rules turn harsh because there is no human life expectancy to use. If the owner died before their required beginning date, the 5-year rule usually applies: the account must be fully distributed by the end of the fifth year after death. If the owner died on or after that date, payout follows the deceased’s remaining life expectancy.

The tax sting is that income retained inside an estate or trust hits the compressed trust tax brackets, which reach the top 37% federal rate at only about $15,650 of income for 2025. A “see-through” or “conduit” trust drafted correctly can let the underlying individual beneficiaries use the 10-year rule instead, which is why naming a trust as TSP beneficiary is a job for an estate attorney, not a DIY form.

Inherited Roth TSP: The Tax-Free Side

A Roth TSP flips the whole analysis because the money already went in after tax. Qualified distributions from an inherited Roth TSP are completely free of federal income tax. A distribution is qualified once the Roth account has existed for at least 5 years, and death automatically satisfies the “qualifying event” part of the test.

The 10-year rule still applies to a non-spouse Roth heir for emptying the account, but there are no annual RMDs during years 1 through 9 on a Roth inherited IRA. That gap is a gift: the smart move is to let the Roth grow tax-free for the full 10 years and take it all in year 10, harvesting a decade of untaxed growth. The 5-year clock counts from the year the original owner first funded any Roth TSP, not from the date of death, so confirm that start year before assuming a withdrawal is tax-free.

Worked Example: Two Daughters Inherit a Traditional and Roth TSP

Here is the math, step by step, so you can copy it. Francine, a federal retiree, dies in July 2024 at age 71, a widow. She names her two daughters, Jean (age 42) and Colleen (age 39), as equal 50/50 beneficiaries. At death her traditional TSP holds $840,500 and her Roth TSP holds $220,750.

Both daughters move their shares directly to inherited IRAs. By the transfer date the traditional account is worth $870,100 and the Roth $260,552. So as of December 31, 2024, each daughter holds a traditional inherited IRA of $435,050 and a Roth inherited IRA of $130,276.

Because Francine had already passed her required beginning date, Jean and Colleen must take annual RMDs from the traditional inherited IRA in years 1 through 9, using the older heir’s (Jean’s) single life expectancy. Jean turns 43 in 2025; the IRS Single Life Expectancy Table gives a factor of 42.9. The first RMD is:

$435,050 ÷ 42.9 = $10,141 (the 2025 RMD each daughter must take from the traditional inherited IRA)

Each later year divides the prior year-end balance by a factor reduced by 1.0 (41.9, then 40.9, and so on), and the entire traditional account must be gone by December 31, 2034. If Jean is in the 24% federal bracket, that first $10,141 RMD costs her about $2,434 in federal tax. The Roth inherited IRA, by contrast, requires no annual withdrawal — both daughters can let it compound tax-free and withdraw the whole $130,276-plus-growth in 2034 with zero federal income tax.

Three Common Scenarios and Their Tax Outcomes

The most common inheritance situations break down like this.

Surviving Spouse Keeps the BPA	Tax Result
Spouse leaves traditional money in the Beneficiary Participant Account	No tax until withdrawal; RMDs based on spouse’s own life at age 73 or 75
Spouse takes the full balance as cash instead	Entire traditional balance taxed as ordinary income in one year, possibly in the top bracket
Spouse dies later with money still in the BPA	Remaining balance paid to the next heir, usually as a fully taxable lump sum

Adult Child Inherits Traditional TSP	Tax Result
Child does nothing for 90 days	TSP forces a lump sum; full balance taxed as ordinary income that year
Child moves it to an inherited IRA in time	Tax spread across up to 10 years; annual RMDs likely required in years 1–9
Child skips a required annual RMD	25% excise penalty on the missed amount, reduced to 10% if corrected promptly

Beneficiary Inherits Roth TSP	Tax Result
5-year holding period already met at death	All qualified withdrawals are 100% federal-income-tax-free
Non-spouse moves Roth to inherited Roth IRA	No annual RMDs; account must be emptied by end of year 10
Roth withdrawn before 5-year clock is met	Earnings portion of the withdrawal becomes taxable

Named Examples Showing the Rules in Action

These mini-cases show how the same rule lands differently depending on the heir.

Robert, the surviving spouse. Robert’s wife Diane, a retired IRS analyst, dies at 68 with a $600,000 traditional TSP. Robert, age 70, keeps it as a BPA and starts RMDs at 73 on his own life expectancy. He pays tax only on each year’s modest RMD, keeping himself in the 12% bracket instead of triggering a six-figure tax bill.

Marcus, the adult son. Marcus, age 45, inherits his father’s $400,000 traditional TSP. He acts within 90 days and moves it to an inherited IRA, then spreads withdrawals across 10 years. By contrast, his cousin let the 90 days lapse on a similar account, took a forced $400,000 lump sum, and paid roughly $40,000 more in federal tax that single year.

Priya, the Roth heir. Priya, age 50, inherits her aunt’s $250,000 Roth TSP that has existed for over 5 years. She moves it to an inherited Roth IRA, takes nothing for nine years, and lets it grow to about $375,000. In year 10 she withdraws the entire amount and owes $0 in federal income tax.

Federal Estate Tax and the IRD Deduction

Income tax is only one layer; a very large estate can also face federal estate tax. For 2025 the federal estate tax exemption is $13.99 million per person, and under the 2025 budget law it rises to $15 million per person for deaths in 2026 and is now permanent. Only estates above that line owe the 40% federal estate tax, so the vast majority of TSP heirs never touch it.

When an estate is large enough to pay estate tax on a traditional TSP, the heir gets relief through the income in respect of a decedent (IRD) deduction. Because the same traditional dollars are hit by both estate tax and income tax, the heir may claim an itemized deduction on Schedule A for the estate tax paid attributable to that income. This avoids true double taxation, but it is technical enough that an estate this size should involve a CPA or tax attorney.

State Taxes: Start With Where You Live

States do not all follow the federal rules, so always separate the two. There is no federal exception that makes inherited traditional TSP income state-tax-free — your state decides that.

No-income-tax states — Florida, Texas, Nevada, Washington, Tennessee, South Dakota, Wyoming, and Alaska — impose no state income tax on inherited traditional TSP withdrawals, a clean and complete answer.
High-tax states — California taxes inherited traditional TSP withdrawals as ordinary income at rates up to 13.3%, and New York taxes them as well, though New York offers a private pension and annuity exclusion of up to $20,000 for qualifying recipients age 59½ or older.
States with their own estate or inheritance tax — a handful, including Maryland, Pennsylvania, New Jersey, and others, levy a separate state estate or inheritance tax that can apply far below the federal exemption, so a TSP that escapes federal estate tax may still face a state bill.

The fix is to look up your own state’s treatment of retirement-plan distributions and any state estate or inheritance tax before you choose a withdrawal schedule, because timing withdrawals into a low-income year can save state tax too.

Step-by-Step: Claiming an Inherited TSP

The death-benefit process runs through the TSP’s record keeper, and the steps are the same for every heir. Handling them in order avoids delay and the forced lump-sum trap.

Notify the TSP. Call the ThriftLine at 877-968-3778 with the deceased’s full name, date of death, date of birth, and marital status. For an active employee, the agency notifies the TSP; for a separated participant, the family must.
Submit a certified death certificate showing the official seal, date of death, and cause of death, mailed to the TSP Death Benefits processing center.
Wait for verification. The TSP takes about 30 to 60 days to identify beneficiaries and resolve any court orders or outstanding loans before paying.
Choose your option in writing before the 90-day default. A spouse elects a BPA, rollover, or cash; a non-spouse elects a direct transfer to an inherited IRA or cash.
Open the receiving account first. Set up the inherited IRA at a custodian before requesting the transfer, so the TSP can send funds directly and avoid the 20% withholding.

Mistakes to Avoid

These errors cost real money, and each has a clear consequence.

Letting the 90-day window lapse. The result is a forced lump sum and a full year’s income tax on the entire traditional balance.
Taking a check instead of a direct transfer. This triggers 20% mandatory withholding and risks the whole amount becoming taxable if not redeposited in 60 days.
Skipping a required annual RMD. You owe a 25% excise penalty on the shortfall, reduced to 10% only if corrected in the window.
A spouse leaving money in a BPA they meant to pass on. The next heir cannot inherit a BPA cleanly and usually gets a taxable lump sum.
Withdrawing an inherited Roth before the 5-year clock. The earnings portion becomes taxable when it could have been tax-free.
Assuming a “stepped-up basis.” Retirement accounts get no basis step-up, so the full traditional balance stays taxable.
Naming a trust without proper drafting. A non-qualifying trust forces a fast 5-year payout at compressed 37% trust rates.

Do’s and Don’ts

Do request a direct transfer to an inherited IRA, because it preserves tax deferral and dodges 20% withholding.
Do confirm whether the deceased had started RMDs, because it decides whether you owe annual RMDs in years 1–9.
Do let an inherited Roth grow for the full 10 years, because every dollar of growth comes out tax-free.
Do spread traditional withdrawals across years, because it keeps you out of the top brackets.
Do check your state’s rules, because conformity to federal treatment is not guaranteed.
Don’t take a forced lump sum by default, because one-year income spikes cost the most tax.
Don’t ignore the 10-year deadline, because the leftover balance gets force-distributed.
Don’t roll a BPA into your own IRA before 59½ if you need the cash, because that exposes you to the 10% early penalty.
Don’t assume Roth withdrawals are automatically tax-free, because the 5-year clock must be met.
Don’t name an estate as beneficiary, because it loses the individual and spousal options.

Pros and Cons of Keeping It Inside vs. Moving to an Inherited IRA

Heirs weigh leaving the money in the TSP against moving it out. Each path has trade-offs.

Pro — staying in a BPA (spouse): simple, low fees, and no 10% early penalty at any age.
Pro — inherited IRA: wider investment menu and the ability to name your own successor beneficiary.
Pro — inherited IRA Roth: no annual RMDs, so the money compounds tax-free for a decade.
Pro — direct transfer: avoids the 20% withholding hit entirely.
Pro — spreading withdrawals: smooths taxable income across years and brackets.
Con — BPA at second death: cannot be passed on as a true inherited account.
Con — forced lump sum: non-spouses who delay face a big single-year tax bill.
Con — 10-year rule: the account cannot be stretched over a lifetime for most heirs.
Con — RMD tracking: annual RMDs in years 1–9 require yearly attention and math.
Con — state tax surprises: a high-tax state can claim a double-digit slice of every traditional dollar.

What to Do Next

Take these steps in order, starting now.

Confirm the beneficiary designation and account type — find out if the inherited money is traditional, Roth, or both.
Notify the TSP and submit the certified death certificate to start the claim clock.
Open an inherited IRA at a custodian before the TSP’s 90-day default forces a lump sum.
Request a direct transfer of each bucket — traditional to a traditional inherited IRA, Roth to a Roth inherited IRA.
Find out if the deceased had started RMDs, then calendar your annual withdrawals through year 10.
Check your state’s tax treatment of retirement distributions and any state estate or inheritance tax.
Call a CPA or estate attorney if the account is large, a trust is involved, federal estate tax may apply, or the IRD deduction is in play.

This article is educational and not a substitute for advice from a licensed CPA, tax attorney, or estate attorney for your specific situation.

Frequently Asked Questions

Is an inherited traditional TSP taxable?

Yes. Every dollar of inherited traditional TSP is taxed as ordinary income when you withdraw it, because the money was never taxed during the owner’s life. There is no stepped-up basis for retirement accounts for tax year 2026.

Is an inherited Roth TSP taxable?

No, qualified withdrawals from an inherited Roth TSP are 100% free of federal income tax. The Roth account must have existed for at least 5 years, and death satisfies the other part of the qualifying test.

Do I pay a 10% early withdrawal penalty on an inherited TSP?

No. Inherited TSP and inherited IRA distributions are exempt from the 10% early-withdrawal penalty at any age. The penalty only returns if a surviving spouse rolls the money into their own IRA and withdraws before 59½.

How long do I have to empty an inherited TSP?

Generally 10 years for most non-spouse heirs, ending December 31 of the 10th year after death. Surviving spouses and other eligible designated beneficiaries can stretch longer over their life expectancy.

Do I have to take yearly RMDs from an inherited TSP?

It depends. If you are a non-spouse heir of a traditional account and the owner had already started RMDs, you must take annual RMDs in years 1–9, enforced starting in 2025. Inherited Roth accounts have no annual RMDs.

What is the penalty for missing an inherited RMD?

25% of the shortfall under SECURE 2.0 for tax year 2025, down from the old 50%. It drops to 10% if you correct the missed amount within the IRS correction window.

Can a surviving spouse keep the money in the TSP?

Yes, through a Beneficiary Participant Account. The spouse defers tax until withdrawal, but money left in a BPA at the spouse’s death cannot be passed on as a true inherited account.

Does inheriting a TSP trigger federal estate tax?

Only for very large estates. The federal estate tax exemption is $13.99 million per person for 2025 and $15 million for 2026. Estates below that owe no federal estate tax on a TSP.

What happens if no beneficiary was named?

The TSP follows a fixed order: surviving spouse, then children, then parents, then the estate, then next of kin. An account that lands in the estate loses the favorable spousal and individual payout options.

Do all states tax an inherited TSP?

No. States like Florida, Texas, and Nevada levy no state income tax, while California taxes withdrawals up to 13.3%. A few states also impose their own estate or inheritance tax below the federal threshold.

Can I roll an inherited traditional TSP into my own IRA?

Only a surviving spouse can. Non-spouse heirs may move the money only to an inherited IRA, never to their own contributory IRA, and the transfer must be direct to avoid withholding.

What is the IRD deduction?

An income-tax deduction for heirs who pay income tax on a traditional TSP that was also hit by federal estate tax. It is claimed on Schedule A and prevents the same dollars from being fully taxed twice.

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