The TSP had previously said that the resulting taxes may not be paid from money within the account and that it will not withhold any amounts to help fulfill the tax obligation. Image: William Potter/Shutterstock.com
The TSP has proposed rules to carry out the previously announced authority beginning in calendar year 2026 for investors to convert money from traditional status to Roth status within their accounts.
The TSP “believes that offering Roth in-plan conversions will improve participant satisfaction and provide valuable retirement planning flexibility while maintaining the TSP’s low administrative costs,” says a notice in the October 15 Federal Register.
It notes that since the option to make investments in Roth status began in 2012, “participants have expressed interest in converting traditional balances to Roth balances within the plan” and that in a survey last year, 35 percent said they are likely or extremely likely to make conversions if allowed.
Under traditional investing, money goes in before taxes but is taxable, along with its associated earnings, on withdrawal; under Roth investing, money goes in after-tax but is tax-free on withdrawal, as are the associated earnings so long as certain conditions are met (if the withdrawal is made at least five years after the beginning of the year in which the first Roth investment was made; and the participant is at least 59 ½ years old, disabled or deceased). Roth balances also are not subject to required minimum distributions, which retirees must begin taking from traditional balances at age 73.
Says the notice, “This proposed rule would permit all TSP participants (active and separated), as well spouse beneficiaries, to convert amounts in their traditional balance to amounts their Roth balance. In accordance with the Internal Revenue Code, the converted amount would be treated as a distribution from the traditional account that is taxable in the year the conversion is done.”
The TSP had previously said that the resulting taxes may not be paid from money within the account and that it will not withhold any amounts to help fulfill the tax obligation. It further earlier said that it is developing a calculator to help estimate the tax impact.
Also as previously announced, there will be a minimum conversion amount of $500. The notice adds further details including that: there will be a limit, not specified, on the number of such transactions allowed each year; participants will have to retain at least $500 in each of their tax-deferred employee contribution, tax-exempt contribution, agency automatic contribution, and agency matching contribution balances; and amounts invested through the mutual fund window feature would have to first be transferred back into one or more of the funds the TSP itself offers.
Of the 7.27 million account holders as of the end of August, 2.84 million had some money in Roth status, totaling $84 billion of the $1.035 trillion total on investment.
Why Timing Matters: RMDs
RMDs start at age 73 for those born between 1951–1959 and 75 for those born in 1960 or later. These mandatory withdrawals can push you into higher tax brackets, raise Medicare premiums, and reduce flexibility.
By doing Roth conversions before RMDs begin, you can:
The key is spreading conversions across multiple years—forming what’s known as a Roth conversion ladder.
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See also,
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