A conversion would require paying taxes on the traditional balance equal to what would be required on a withdrawal. Image: Andrey_Popov/Shutterstock.com
By: FEDweek StaffThe TSP will begin offering account holders the option to convert part or all of their traditional investments to Roth status starting in 2026, officials said at the November meeting of the program’s governing board.
Under traditional investing, money is invested on a pre-tax basis but the investment and its earnings are taxable on withdrawal; under Roth investing, money is invested after-tax but is tax-free on withdrawal, as are the investment’s earnings if certain conditions are met. Roth balances also are not subject to required minimum distributions, which retirees must begin taking from traditional balances at age 73.
While investors may choose either for their personal investments, agency contributions for FERS employees (and military personnel) are only in traditional status.
A conversion would require paying taxes on the traditional balance equal to what would be required on a withdrawal, which “cannot be paid with TSP assets,” according to the presentation. It added that in the most recent participant survey, 24 percent “indicated understanding of Roth conversion and tax implications” and 35 percent said they would “likely or “extremely likely” to use a Roth conversion feature if offered.
The presentation also showed that of the $947 billion on investment with the TSP as of the end of October, $68 billion had been invested in Roth status. Of the nearly 7.2 million accounts held by current and former federal and military personnel, 2.7 million have money in Roth status.
That includes 1.1 million of the more than 4.1 million accounts of current or former employees under FERS, whose average Roth balance is about $32,000 out of a total of about $192,000.
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