New TSP Roth Conversion Option: What It Means for Federal Employees

Starting in 2026, the Thrift Savings Plan (TSP) will allow something new, something that could quietly change how federal workers build wealth for retirement.

You’ll soon be able to convert your traditional (pre-tax) TSP savings into your Roth TSP. Right inside the plan.

It’s called an in-plan Roth conversion, and while it may sound like a small administrative tweak, it can have big financial consequences, good or bad, depending on how and when you use it.

So, let me unpack how this works, why it might (or might not) make sense, and what kind of federal employees could benefit most.

What is an in-plan Roth conversion?

Imagine you already have money in your traditional TSP, the account where your contributions go in before taxes. An in-plan Roth conversion allows you to move some (or all) of those funds into your Roth TSP, where future growth and withdrawals can be tax-free.

But, of course, there is no free lunch. You’ll owe taxes now on whatever you convert. Think of it like paying the bill today so you don’t get one later.

When a Roth conversion makes sense

A Roth conversion is one of those financial moves that seems simple on the surface but has layers underneath. It’s kind of like a chess move that looks small until you realize it changes the whole board. So, it’s not right for anyone at any time.

Here are a few times it might be worth considering:

1. You expect higher taxes later.
   If you believe tax rates will rise (or your own income will), paying taxes now could save you money long-term.
2. You’re younger and in a lower tax bracket.
   The earlier in your career you are, the more years your converted Roth money has to grow tax-free.
3. Your portfolio is temporarily down.
   Converting after a market decline means paying taxes on a smaller balance and potentially watching future rebounds happen tax-free.
4. You have large medical expenses this year.
   Medical costs can reduce your taxable income, helping offset some of the taxes from a conversion.
5. You’re high-net-worth and legacy-minded.
   Roth accounts can be passed to heirs tax-free, making this an appealing strategy if you’re unlikely to need all your TSP funds in retirement.
6. You plan to move to a higher-tax state.
   Converting while you live in a lower-tax state means paying less on the same income.

When it might not be the right move

As with most things in finance, timing and personal circumstance are everything. There are situations where a Roth conversion can work against you:

1. You’d have to pay taxes from the TSP itself.
   The TSP doesn’t allow that. Taxes must come from cash or another account. If you can’t pay from outside funds, it’s usually better not to convert.
2. You’re close to retirement in a high tax bracket.
   Waiting until your income drops in retirement could mean paying less in taxes on the same conversion.

Taxes: the crucial math

A Roth conversion adds the converted amount to your taxable income for the year. For example, if you and your spouse file jointly with $250,000 in income and convert $200,000, you jump from the 24% to the 32% tax bracket.

Sometimes, converting smaller portions over several years (“filling up” your current tax bracket) makes more sense. You can run those numbers with your financial adviser or tax professional to avoid bracket creep.

The Roth five-year rule

One important detail often overlooked: once you convert to a Roth, that money must sit for five years before you can touch it without penalty.

Even if you already had a Roth TSP, the five-year clock resets for the converted funds. Withdraw too soon, and you could owe a 10% penalty plus taxes if you’re under 59½.

Can you change your mind later?

Short answer: No. Once you do a Roth conversion, it’s permanent.

There’s no “undo” button, so it’s worth running the numbers carefully before pulling the trigger.

The big picture

Roth conversions, including the new in-plan option for federal employees, are neither inherently good nor bad. They’re tools. Like all tools, they work best when used for the right job.

The key question isn’t can you do one, but should you? That answer depends on your tax situation, your retirement timeline and your long-term goals.

Think of it like prepaying for the future: you pay Uncle Sam now so you can enjoy tax-free income later. But whether that trade-off makes sense depends on your unique financial blueprint.

If you’re a federal employee wondering whether a TSP Roth conversion could fit into your plan, let’s talk it through. At Advance Capital Management, we have years of experience in helping federal workers make informed retirement decisions.