by Todd Pouliot , AIF
www.mygatewaymoney.com
In November 2024, Thrift Saving Plan (TSP) officials announced a significant update that will
affect the lives of all 4.1 million account holders starting in 2026: the introduction of in-plan
Roth TSP Conversions. We understand this news may have you asking, “What does this mean for me?”
Let’s explore how this change could benefit you and your fellow participants. In our previous blog
post, you can read about the current Roth TSP offering: Traditional TSP vs. Roth TSP: Understanding
the Differences.
What Is a Roth TSP Conversion?
A Roth TSP Conversion allows you to transfer funds from your Traditional TSP account to your Roth
TSP account, also called an in-plan conversion. It’s important to note that this process does
trigger a taxable event. This means any amount you transfer from your Traditional TSP to your Roth
TSP will be counted as taxable income for the year of the conversion.
Why is this change meaningful for TSP participants?
This new option is truly a game-changer for TSP account holders. Until now, in-plan conversions
have not been available to most federal employees, creating barriers for many.
Here’s how the current TSP rules work:
● Federal employees cannot directly convert Traditional TSP funds to Roth TSP assets. Instead,
they must transfer those funds to a Traditional IRA and then to a Roth IRA.
● Active employees can only transfer TSP funds if they are separated from service or aged 59½ or
older.
Starting in 2026, the introduction of in-plan Roth TSP Conversions will simplify this process and
offer you more flexibility in managing your retirement savings.
Who Might Benefit the Most from Roth TSP Conversions?
While this new feature will be advantageous for all TSP participants, we recognize that the
benefits will vary according to individual circumstances. A Roth In‐Plan conversion allows you to
elect to convert any or all of your pre‐tax assets to Roth assets. This allows you to build
tax‐free retirement income, and it may help you manage your tax liability in the future—hint:
smaller periodic Roth Conversions can prevent a massive tax bill.
Federal Retirees
For retirees, this is a mixed bag. Those who choose to keep their funds in the Thrift Savings Plan
(TSP) will find this change particularly beneficial. Retirees already have the option to transfer
funds from their Traditional TSP to a Roth IRA. However, with this new in-plan conversion option,
account holders will have greater convenience and flexibility in managing their accounts directly
within TSP, which is a tremendous advantage.
Current Federal Employees
For current employees, the impact may depend on your individual situation. Roth Conversions are
often pursued for future tax benefits. However, if your current income will be higher than what you
expect after retirement, converting might not be the best choice for you right now. There are particular scenarios in which Roth TSP
Conversions could be
quite beneficial:
● Lower Household Income: If your household is facing a temporary decrease in income—perhaps due
to a spouse stepping away from work to care for children, taking time off, or dealing with
unemployment—this might be an ideal time to consider a conversion while tax rates are lower.
● Loss of a Spouse: The year you lose a spouse can be incredibly challenging, but it may also
provide a unique opportunity for a Roth TSP Conversion. In that difficult year, the surviving
spouse can file a joint tax return, which often results in lower taxable income rates than they
would face if filing as single in subsequent years. This tax planning strategy is called the
“widow’s penalty,” it’s crucial to look for ways to ease the financial burden during such a tough
time.
● Early Career Years: Earnings are often at their lowest in the early stages of a federal
employee’s career. This can make Roth TSP Conversions more appealing due to a reduced tax burden.
However, it’s essential to consider that employees in this stage might struggle to cover the taxes
associated with a conversion unless they have additional resources available.
A Positive Change for TSP Participants
Questions to consider: There are two key questions to recognize before converting your eligible
workplace savings to a Roth account. The decision to convert must be made carefully and should
include a consultation with your tax advisor. 1) How will you pay taxes on the conversion? You are
responsible for paying taxes on the applicable conversion amounts to Roth. Income taxes will not be
withheld at the time of conversion, so you should be sure you can pay taxes outside the plan. 2) Do
you think you’ll be better off paying taxes on the money now or later? In general, the longer you
have until you retire, and if you expect your tax rate in retirement to be higher than your current
rate, the more likely you are to benefit from Roth assets.
No matter where you are in your federal service journey, the new Roth TSP Conversion feature is a
positive step forward for all participants.
If you’re uncertain about how this change may affect your specific circumstances or need assistance
planning your TSP and Roth Conversions, please don’t hesitate to schedule an initial consultation.
We’re here to help you navigate this new opportunity and make the best choices for your future.
Don’t forget to Leverage your TSP to maximize your Social Security benefit. This is another
excellent blog read for those planning your retirement cash flow.
