IMPORTANT CLARIFICATION: Roth In-Plan Conversions, Not Roth IRA Conversions

Beginning January 1, 2026, the Federal Retirement Thrift Investment Board will implement a significant policy change allowing Thrift Savings Plan participants to convert traditional (pre-tax) TSP balances to Roth (after-tax) balances directly within their TSP accounts. This is NOT a conversion to external Roth IRA accounts, but rather Roth in-plan conversions that remain within the TSP system.

Federal employees and military members must understand this critical distinction. The new feature allows conversions from traditional TSP to Roth TSP balances, maintaining all funds within the existing TSP framework rather than transferring assets to external Individual Retirement Accounts.

DISCLAIMER: This information is provided for educational purposes only and does not constitute investment, tax, or financial advice. All federal employees must conduct their own research and consult with qualified tax professionals before making any conversion decisions.

Legislative Authority and Implementation Timeline

The SECURE 2.0 Act of 2022 authorized this enhancement to federal retirement benefits. The Federal Retirement Thrift Investment Board has confirmed implementation will commence January 1, 2026, following extensive system development and testing phases.

Participants who do not currently maintain Roth TSP balances will automatically have Roth accounts established upon executing their first in-plan conversion. This process requires no separate account opening procedures or additional administrative steps beyond the conversion request itself.

Mechanical Operations of Roth In-Plan Conversions

Conversion Process Requirements

The Roth in-plan conversion process operates under strict federal guidelines governing retirement account modifications. Traditional TSP balances, consisting of pre-tax employee contributions and matching agency contributions, may be converted to after-tax Roth TSP status through formal conversion requests.

CRITICAL TAX REQUIREMENT: Federal employees must pay all income taxes associated with conversions using external personal funds. TSP regulations strictly prohibit using any portion of converted TSP assets to satisfy tax obligations.

Taxable Event Creation

Each conversion creates an immediate taxable event in the calendar year of execution. The entire converted amount becomes taxable ordinary income subject to current federal income tax rates and applicable state income tax obligations where relevant.

Converted amounts are reported on Form 1099-R and must be included in gross income calculations for the tax year. Federal employees must ensure adequate cash reserves exist to satisfy tax liabilities without compromising conversion objectives or creating financial hardship.

Tax Implications and Compliance Considerations

Income Tax Calculations

Conversion amounts are taxed at ordinary income rates corresponding to total adjusted gross income levels. Federal employees must calculate additional tax liabilities carefully, considering how conversion amounts may affect marginal tax bracket positioning and overall tax burden calculations.

WARNING: Large conversion amounts may push federal employees into higher tax brackets, substantially increasing effective tax rates on both conversion amounts and existing income sources.

State Tax Considerations

State income tax treatment varies significantly across jurisdictions. Federal employees must research specific state tax laws governing TSP conversions and Roth account treatments. Some states do not tax retirement account conversions, while others impose full ordinary income tax obligations.

COMPLIANCE NOTICE: Federal employees are solely responsible for understanding and complying with all applicable state and local tax obligations related to TSP conversions.

Strategic Beneficiaries of Roth In-Plan Conversions

Military Personnel Advantages

Active duty military members frequently operate in reduced tax environments due to combat pay exclusions, deployment allowances, and base location factors. These circumstances create optimal conversion opportunities where current tax rates remain substantially below projected retirement-year tax obligations.

Military members should evaluate conversion opportunities during deployment periods when taxable income may be significantly reduced, creating favorable conversion tax scenarios.

Federal Employees in Lower Tax Years

Federal employees experiencing temporary income reductions due to unpaid leave, career transitions, or early retirement scenarios may benefit from strategic conversion timing. Lower current-year income creates opportunities to convert traditional TSP balances while maintaining favorable tax bracket positioning.

Required Minimum Distribution Avoidance

Roth TSP balances are not subject to Required Minimum Distribution obligations beginning at age 73. This feature provides significant long-term planning advantages for federal employees seeking maximum retirement account growth potential and estate planning flexibility.

IMPORTANT NOTICE: Traditional TSP balances remain subject to Required Minimum Distribution requirements regardless of Roth conversion activities on other account portions.

Mandatory Roth Catch-Up Contributions for High Earners

2026 Catch-Up Contribution Changes

Concurrent with Roth in-plan conversion implementation, federal employees aged 50 or older earning more than $145,000 in the previous calendar year must direct all catch-up contributions to Roth TSP accounts rather than traditional pre-tax accounts.

This requirement affects federal employees in higher General Schedule pay grades, Senior Executive Service positions, and military officers with significant years of service. Affected employees must adjust payroll deduction elections to comply with mandatory Roth catch-up contribution requirements.

Earnings Threshold Calculations

The $145,000 earnings threshold applies to total calendar year compensation including base pay, overtime, bonuses, and other taxable compensation reported on Form W-2. Federal employees must monitor annual earnings carefully to ensure compliance with catch-up contribution requirements.

Risk Factors and Important Warnings

Conversion Timing Risks

RISK WARNING: Converting large traditional TSP balances during high-income years may result in substantial additional tax obligations and potential bracket creep affecting total tax burden calculations.

Federal employees must evaluate conversion timing relative to career earnings patterns, anticipated retirement income needs, and projected future tax rate environments. Poor conversion timing may eliminate potential long-term benefits through excessive current-year tax costs.

Liquidity Requirements

Conversion tax obligations require immediate cash payment using personal funds external to TSP accounts. Federal employees lacking adequate liquid assets to satisfy conversion tax obligations should not proceed with conversion activities.

FINANCIAL WARNING: Converting TSP balances without adequate external funds to pay required taxes may create financial hardship and force disadvantageous asset liquidation or debt accumulation.

Market Volatility Considerations

Converting traditional TSP balances during market downturns may result in paying taxes on higher historical values while converted Roth balances reflect current reduced market valuations. Federal employees should consider market timing factors when evaluating conversion opportunities.

Professional Guidance Requirements

Tax Professional Consultation

The Federal Retirement Thrift Investment Board strongly recommends consultation with qualified tax professionals before executing any Roth in-plan conversion activities. Tax professionals can provide personalized analysis of conversion implications considering individual income situations, state tax obligations, and long-term retirement planning objectives.

PROFESSIONAL CONSULTATION NOTICE: Federal employees should obtain independent tax advice specific to their individual circumstances rather than relying solely on general information sources.

Federal Benefits Analysis

Federal employees should consider Roth conversion activities within the broader context of total federal benefits packages including Federal Employees Health Benefits, Federal Employees Group Life Insurance, and pension benefit calculations under FERS or CSRS systems.

Implementation Timeline and System Development

TSP System Enhancements

The Federal Retirement Thrift Investment Board is developing comprehensive system enhancements to support Roth in-plan conversion processing. These improvements include conversion request interfaces, tax reporting capabilities, and participant communication systems.

Additionally, the TSP is creating conversion calculator tools to assist participants in estimating tax implications and conversion effects on retirement account balances. These tools will provide preliminary analysis capabilities while reinforcing the necessity for professional tax consultation.

Participant Education Initiatives

The TSP will implement extensive participant education programs throughout 2025 preparing federal employees for Roth in-plan conversion availability. Educational materials will cover conversion mechanics, tax implications, and strategic considerations relevant to federal employee retirement planning.

Action Steps for Federal Employees

Immediate Preparation Requirements

Federal employees interested in Roth in-plan conversions should begin immediate preparation activities including:

• Tax situation analysis: Review current and projected future tax obligations
• Cash flow assessment: Ensure adequate liquid funds exist for conversion tax payments
• Professional consultation: Schedule meetings with qualified tax advisors
• Documentation review: Gather current TSP statements and tax records

Benefits Review Scheduling

Federal employees should schedule comprehensive benefits reviews to evaluate Roth conversion opportunities within total retirement planning strategies. Professional benefits analysis can identify optimal conversion timing, amounts, and coordination with other federal benefits programs.

SET A MEETING IN BENEFITS REVIEW: Schedule your personalized federal benefits consultation at https://federalbenefitservice.com/benefits-review/ to discuss Roth conversion strategies specific to your federal employment situation.

Legal Disclaimers and Compliance Notices

No Investment Advice Disclaimer

NO INVESTMENT ADVICE: This information is provided for educational purposes only and does not constitute investment advice, tax advice, or financial planning recommendations. Federal employees must conduct independent research and obtain professional guidance appropriate to individual circumstances.

Personal Responsibility Notice

Federal employees bear sole responsibility for all investment decisions, tax obligations, and retirement planning activities. No information contained herein should be construed as guarantees of investment performance, tax outcomes, or retirement security.

Regulatory Compliance Warning

COMPLIANCE WARNING: Federal employees must ensure all TSP activities comply with applicable federal regulations, tax obligations, and employment requirements. Failure to comply with TSP regulations may result in penalties, tax consequences, or benefit restrictions.

Do Your Own Research Requirements

Federal employees must conduct comprehensive independent research before making any TSP conversion decisions. This research should include:

• Individual tax situation analysis with qualified professionals
• State and local tax law review
• Long-term retirement income planning evaluation
• Federal benefits coordination assessment
• Market timing and investment strategy considerations

RESEARCH REQUIREMENT: It is very important to do your own analysis of conversion implications specific to your federal employment situation, tax circumstances, and retirement planning objectives before proceeding with any conversion activities.

Federal employees should utilize multiple information sources, professional consultation services, and comprehensive planning tools to ensure informed decision-making regarding Roth in-plan conversion opportunities beginning in 2026.