TSP Roth Conversions: Plan the Tax Year

Roth savings are becoming a larger part of federal retirement planning. For employees weighing future taxes alongside a FERS or CSRS annuity, the ability to hold both traditional and Roth TSP money creates more choices about how to fund retirement.

Those choices come with trade-offs. A TSP Roth conversion moves existing savings into a different tax treatment; it does not create an investment gain or guarantee lower lifetime taxes. Before converting, compare the current tax cost, your expected income, and when you may need the money.

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What the $100 billion milestone tells us

FEDweek reported on September 22, 2026 that Roth TSP balances reached approximately $101 billion in August. About 2.9 million participants, roughly 40 percent of the more than 7.3 million account holders, held Roth money. Its report also noted that approximately $1 billion had moved through the new in-plan conversion option earlier in the year.

Those figures show adoption, not proof that a conversion fits every household. Your salary, retirement date, other savings, tax filing status, and expected withdrawals matter more to the decision than the number of people choosing Roth.

Separate contributions from conversions

Roth payroll contributions come from income that is taxed now. Traditional contributions generally reduce current federal taxable income, with tax due on taxable withdrawals later. Qualified Roth distributions, including earnings, are tax-free. Not every Roth withdrawal is qualified, and previously taxed amounts can change the treatment of traditional distributions.

An in-plan conversion changes the tax treatment of money already in your TSP. The previously untaxed portion becomes income in the conversion year. Moving that money does not change its investment risk by itself. Review investment allocation separately from the tax decision.

TSP's participant education explains that conversions became available in 2026. Before submitting a request, check current TSP eligibility, transaction restrictions, and the amount available for conversion. A conversion cannot simply be reversed because your tax estimate changes.

Budget for taxes before moving the money

TSP does not withhold conversion taxes from the amount moved within the account. Plan to cover the tax from funds outside the conversion, and discuss estimated payments or withholding adjustments with a qualified tax professional. Waiting until tax-return season can create an avoidable cash shortage or underpayment penalty.

Build the estimate around your entire year: wages, pension income, taxable Social Security benefits, other withdrawals, investment income, and deductions. Include state taxes where applicable. Preserve enough accessible savings for ordinary expenses and emergencies after paying the conversion tax.

For illustration, a $20,000 fully taxable conversion taxed entirely at a hypothetical 22 percent federal marginal rate would add $4,400 of federal tax before other interactions. That is arithmetic, not a forecast of your tax bill. Portions of a conversion may fall into different brackets, and other income-based provisions can change the result.

Compare several conversion amounts

A large conversion is not automatically a mistake, and a small annual conversion is not automatically optimal. Compare no conversion, a partial conversion, and other realistic amounts over several years. A year between leaving employment and beginning another income stream may look different from a full salary year.

Moving into a higher marginal bracket does not apply that higher rate to every dollar of income. It generally applies to the portion in that bracket. Still, the additional income can affect deductions, credits, benefit taxation, or other costs, so a bracket-only calculation is incomplete.

Use estimates with consistent assumptions. No one can promise future tax rates, investment returns, or an exact lifetime tax saving.

Include Medicare premiums and required distributions

Qualified Roth withdrawals generally do not enter federal adjusted gross income. That can provide flexibility when managing retirement income. However, the taxable portion of a conversion raises income in the conversion year and may increase Medicare income-related premium adjustments later.

Social Security generally uses tax information from two years before the premium year to determine IRMAA for Medicare Part B and prescription drug coverage. Compare the conversion with the thresholds and rules relevant to your household instead of assuming Roth automatically prevents a surcharge.

Roth TSP balances are not subject to required minimum distributions during the owner's lifetime. Beneficiary rules still apply. Traditional balances remain subject to applicable RMD rules; the starting age and timing depend on birth year and employment circumstances. A required distribution itself cannot be converted. Confirm your applicable rules before including those funds in a conversion plan.

Keep the two five-year rules separate

IRS guidance distinguishes the holding period for qualified designated Roth distributions from the special recapture rule for in-plan conversions. They answer different questions.

Qualified distributions: The designated Roth account must satisfy its five-tax-year period, and the distribution must meet an age 59½, disability, or death condition. Confirm how your TSP contribution and rollover history affects that period.
Conversion recapture: A distribution attributable to a taxable in-plan conversion within its five-tax-year period may trigger a 10 percent additional tax unless an exception applies. Each conversion year has its own period, beginning January 1 of that year.

Do not assume Roth IRA withdrawal ordering applies to the TSP. Account-specific rules, allocation of earnings, and exceptions matter, particularly if you expect to use the money before age 59½. Obtain the applicable TSP distribution information before relying on a withdrawal to fund a spending need.

Bring the tax decision into your federal benefits plan

Prepare your latest TSP statement, recent tax return, estimated current-year income, projected retirement date, and available cash for taxes. Record the first year of Roth participation and any conversion history. Have a qualified tax professional review the proposed conversion and payment plan before submitting it.

Internal Benefit Advisors helps federal employees organize retirement eligibility, benefit estimates, insurance decisions, and TSP considerations. An IBA TSP guidance session can help place the account decision alongside your expected annuity and household spending. Coordinate the tax calculation with your tax professional.

Bring your questions to a retirement benefit review and compare the choices before committing to a taxable conversion.