What to do with inherited assets including a variable annuity and TSP? Help please.

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Topic Author
41fan
Posts: 98
Joined: Tue Mar 07, 2017 3:15 pm

What to do with inherited assets including a variable annuity and TSP? Help please.

Post by 41fan »

My father passed away recently and left some assets to my brother and myself. I am hesitant about what to do about a few of the accounts due to not knowing about tax treatments, etc. My goal is to keep as much invested in tax advantaged accounts as possible (with as little fees as possible), with as little impact to my tax bill this year as possible. The accounts in question are:

Roth IRA - It appears that I have the option of a full distribution of my 50% of his Roth IRA or I can roll my share into an Inherited Roth IRA. I would like to maintain the tax-free growth of this account as much as possible, but I have a few questions:
  • Any penalties or taxes at all to taking a full disbursement since it is a Roth?
  • If I converted my share into an Inherited Roth IRA, it is my understanding that I must take it all out within 10 years. Would there be any issue with taking it out in 10 equal yearly distributions, and then maxing out my own Roth IRA contribution with this money? (I have not been currently contributing to a Roth, and I do have an earned income that would allow Roth contributions.)
  • The Roth IRA is currently with Victory Funds. If I wanted to end up with an Inherited Roth IRA at Vanguard where my other accounts are, how would that work? Do I need to create an Inherited Roth IRA at Victory Funds to roll my share of his Roth into, and then transfer the Inherited Roth from Victory to Vanguard?
Variable Annuity - He had a variable annuity, and I am not very familiar with this instrument. Its value is around 104K, so my share is around 52K. About 44K of my 52K is taxable they said. Again, there are several options available here but I am not sure what is the best for me:
  • Immediate Lump Sum Payment - I like the idea of this, I could just invest it all in my taxable account at Vanguard, but I don't want to pay taxes on 44K of inheritance additional to my normal taxes this year.
  • 5 Year Deferral of Immediate Lump Sum Payment - Does this lock everything up for 5 years? Could I make withdrawals of any amount at any time within the 5 years? What are the tax ramifications of this?
  • Annuitization - not sure what this option means or what the ramifications are.
  • Life Expectancy Payments - not sure what this option means or what the ramifications are.
  • Proceeds to Guardian Asset Account (GAA) - not sure what this option means or what the ramifications are.
Thrift Savings Plan - Dad had a TSP account, although it didn't have a huge amount in it. Is this treated like a Traditional IRA? Can it be rolled into a pre-tax IRA?

Thank you for any help offered here. I have enjoyed reading this site and have learned a lot. Hoping someone can clarify my options with these accounts and help suggest the best avenue for these accounts.
Last edited by 41fan on Thu Aug 18, 2022 5:41 pm, edited 1 time in total.
HomeStretch
Posts: 11419
Joined: Thu Dec 27, 2018 2:06 pm

Re: What to do with inherited assets? Help please.

Post by HomeStretch »

I am sorry for your loss.

Did your father satisfy the 5-tax year clock on initial Roth IRAs? If not, the Roth IRA earnings when distributed would be subject to income tax until you held the account long enough to complete the 5-year period.

Yes, you need to create the Inherited Roth at Victory first. Then open an account at Vanguard and initiate the account transfer at Vanguard to pull it from Victory. Inherited IRAs have to be titled in a specific way so be sure that is done correctly at both financial institutions.

I suggest you add something such as “including a variable annuity and TSP account” to the thread title to catch the attention of some knowledgable posters about annuities and the TSP for beneficiaries (there are some quirks).
Topic Author
41fan
Posts: 98
Joined: Tue Mar 07, 2017 3:15 pm

Re: What to do with inherited assets? Help please.

Post by 41fan »

Thank you for the kind words and assistance. Dad was an amazing man and I miss him every day.

He did fulfill the 5-year clock on his Roth IRA. I believe he started it in 1998 or so.

I will edit the title as you suggested. Thanks!
chemocean
Posts: 1574
Joined: Mon Dec 19, 2016 8:45 pm

Re: What to do with inherited assets including a variable annuity and TSP? Help please.

Post by chemocean »

Was your father the original owner of the TSP? or did HE inherit the TSP from his wife?
If your father inherited the TSP from his wife and had a beneficiary TSP, you will be receiving the funds as a taxable lump sum payment.

If you are the beneficiaries of a TSP account of an original owner, you MUST rollover the funds into an inherited IRA within a short time or receive the funds as a taxable lump sum payment.

Go to TSP and search for booklet 31. Read the instructions for a non-spousal beneficiary. There is a current thread of a beneficiary of a TSP of an original owner, who is have trouble getting TSP to acknowledge the receipt of the account owner's death certificate. From the text in the booklet published in May 2022, you have 60 days from the time that TSP send you the non-spousal beneficiary packet to rollover the funds over to an inherited IRA.
Topic Author
41fan
Posts: 98
Joined: Tue Mar 07, 2017 3:15 pm

Re: What to do with inherited assets including a variable annuity and TSP? Help please.

Post by 41fan »

Chemocean,

Dad was the original TSP owner.

Thank you for the TSP guidance. I have gotten surprisingly little info from TSP or his FEGLI life insurance policy to this point. I did get a packet from TSP but it wasn’t about what I wanted to do with my share of the account as much as it was info about when Dad passed, who the surviving beneficiaries are, etc. I assume they will soon be mailing me a second packet with info about how I want to handle my part of the plan assets?
swylie
Posts: 116
Joined: Thu Sep 10, 2020 7:59 pm

Re: What to do with inherited assets including a variable annuity and TSP? Help please.

Post by swylie »

Chemocean,

Many here know more about annuities than I do, but as you are discovering they are complicated products and you'll need to get quotes from the insurance company in order to choose your best option. Once you annuitize, the money is tied-up and you don't have access to it. So for example, if you choose a five year certain payout, you'll get $XXX amount per year paid either monthly or quarterly as you choose. Total up all the payments and you'll be able to figure out the additional interest your share will earn over the five years. Also important to consider are taxes for each scenario. My dad had an annuity and was forced to decide annuitize or take a lump sum payment at age 90. We figured out that the taxes were pretty much a wash whether we paid them on the lump sum or deferred them over several years, so we decided to take a lump sum and use the money as he wished. You won't get any help from the insurance company deciding which is your best option--but ask them to run quotes on all option that interest you so you can compare and get a full picture. Also, get the customer reps to clearly explain each option, that's their job. And remember, in most cases once you decide you're locked into whatever option you've chosen.

Good luck!
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