Thrift Savings Plan - Is Roth Conversion Right for You?

Since the end of 2025, amid a significant influx of communications to our vast federal employee client base, questions about in-plan Roth conversions have been center stage.  For many military service members and federal employees, the Thrift Savings Plan (TSP) is easily the most important retirement savings tool available for them. 

Recently, TSP introduced a new feature that enables in-plan Roth conversions, giving participants greater flexibility in managing taxes and retirement growth.

While Roth conversions can be a powerful tool, sometimes they can be like giving a hammer to a lumberjack if not used correctly.  Below are several key topics to help you understand how this strategy works and whether it might make sense for your situation.

 

Working While Contributing

The new in-plan conversion feature allows TSP participants to convert traditional TSP funds into Roth funds without moving the money into an outside IRA.  This is especially profound because usually, clients would have had to meet a qualifying event to roll it over:

●       Turn age 59.5

●       Retirement

●       Change jobs

Their TSP balance must roll into a traditional IRA after this qualifying event to perform Roth conversions at a custodian like Charles Schwab, for example. Now, participants who are still working can convert funds directly within the TSP plan itself.

This is particularly valuable for federal employees or military members who:

●       Are still actively employed

●       Want to adjust the tax treatment of their retirement savings

●       Prefer to keep their assets within the TSP plan structure

However, there is an important timing rule. Any converted funds must remain in the Roth account for at least five years before they can be withdrawn without penalty. Because of this, conversions generally work best for individuals who still have several years before retirement.

 

Differences in Contribution and Growth Considerations

To understand Roth conversions, it’s helpful to review the difference between traditional contributions and Roth contributions.

 

Traditional Contributions

Traditional TSP contributions are made with pre-tax dollars, meaning the money is not taxed when it goes into the account. Instead, it grows tax-deferred and is taxed later when withdrawn in retirement.

This approach often benefits individuals who expect to be in a lower tax bracket later in life and are likely in higher tax brackets now.  Think about your federal ranking or G number; the higher this is, the more important pre-tax contributions likely are.

 

Roth Contributions

Roth contributions work differently. The money is taxed today and contributed with “net pay” dollars, but once inside the Roth account, both the contributions and their growth can be withdrawn tax-free in retirement.

For younger investors or those with many years of growth ahead, this can be extremely powerful.  Dave Ramsey and the Ramsey Solutions Team say to find an advisor who puts you into high-quality mutual funds averaging 8-10% per year.   If the market grows over time—as many investors expect—paying taxes now could potentially result in significant tax-free growth later.  The tax hit today could be made up within 3-5 years.

A Roth conversion essentially shifts money from the tax-later bucket to the tax-free bucket.

General Considerations and Rules

Before making a Roth conversion, there are several important considerations.  Some of this may be outside of your scope and expertise, but that is okay.

 

Immediate Tax Liability

When you convert traditional funds to Roth, the amount converted becomes taxable income for that year, but due before the following year’s tax deadline (think April 15, 2027, for dollars converted today in 2026)

For example:

●       A $10,000 conversion

●       At a 22% tax bracket

●       Creates $2,200 in tax liability

If the conversion occurs in 2026, the taxes would typically be due by April 2027.

This means you must plan and ensure you have sufficient cash available to cover the tax bill.  This is cash above and beyond your 6 months of expenses saved in your emergency fund.

 

Avoid Withholding Taxes from the Conversion

TSP does not allow participants to withhold taxes from the converted amount, but this is usually not recommended anyway.

If taxes are withheld directly from the conversion:

●       The withheld amount may be treated as an early withdrawal

●       Individuals under age 59½ could face a 10% penalty

Instead, it is generally better to convert the full amount and pay the tax bill using funds outside the retirement account, as previously described.

 

The Five-Year Rule

The five-year rule is a major consideration.  Converted funds must stay in the Roth account for five years before they can be withdrawn without penalty.

Because of this rule, Roth conversions are typically not ideal for people close to retirement who expect to access the funds soon.  Funny enough, we get most of the interest and questions from our clients who have:

●       Amassed a lot of dollars in their TSP

●       Are nearing retirement

This is great to know because you could be retired and need the funds, but have to wait, which is not suitable. 

Or you could be retired and not need the funds right away; you can easily wait the 5 years, and the conversion is suitable.

This is a very nuanced topic, and not every situation is the same.

 

Is It Right for You?

Furthermore, deciding if a Roth conversion makes sense depends on several factors, including:

●       Your current income and tax bracket

●       Your debt in retirement

●       Your expected income in retirement

●       Your expected expenses in retirement

●       Your liquidity to pay taxes in 4-16 months

●       Your retirement timeline

●       Your long-term financial goals

How will retirement look for you?  Many retirees find themselves in a lower tax bracket once they stop working.  However, some individuals continue earning income in retirement through consulting, part-time work, or business activity.  In these cases, having a pool of tax-free Roth assets can be extremely valuable for people who continue to find themselves in higher tax brackets.

Although this may seem the opposite of my previous point of higher earners contributing to pre-tax assets PRE-retirement, a Roth balance can help cover large expenses IN retirement without increasing taxable income, such as:

●       Buying a car in cash

●       Replacing a roof or HVAC system

●       Renovating a home

●       Handling unexpected expenses

Having tax-free funds available provides flexibility and can help retirees avoid taking on debt later in life.

Work With an Advisor to Execute the Strategy

Roth conversions are not one-size-fits-all decisions. The right strategy depends on a full picture of your financial situation.

Key variables that should be evaluated include:

●       Current earnings

●       Total taxable income

●       Interest from savings or CDs

●       IRA distributions

●       Pension income

●       Social Security benefits

●       Capital gains or losses

●       Dividend income

●       Overall liquidity and risk tolerance

Given the many moving parts, working with a financial advisor like those at Whitaker Myers Wealth Managers can help you determine whether a Roth conversion fits your broader retirement strategy.

For many federal employees and military families, the new TSP conversion option presents an exciting opportunity—but it should be implemented carefully and strategically with your trusted financial professional.