Starting in January 2026, conversions will be allowed from traditional balances to Roth balances. Image: SiljeAO/Shutterstock.com
By: FEDweek StaffThe TSP has added details to previously announced changes regarding the available lifecycle L funds and an upcoming option for in-plan conversions of funds from traditional tax treatment to Roth status.
After the close of markets June 27 the lifecycle L 2025 fund will have its final valuation and it will merge with the Income fund. Merging funds into the Income fund as they reach the same investment profile–the target date funds get more conservative over time—previously happened with funds for 2010 and 2020.
As of the end of April, the Income fund—meant for investors who already are retired or who soon will be—was the fourth-largest of the L funds, with some $27 billion in assets. It will remain in that position once combined with the 2025 fund’s more than $11 billion. The 2030 fund is the largest, $56 billion, followed by 2040, $55 billion, and 2050, $45 billion.
Money in the 2025 fund “will roll into the L Income fund automatically” and the TSP will send “targeted communications to participants with a balance/election in L 2025,” according to a presentation at a meeting of the TSP governing board.
On June 30, an L 2075 fund will be launched, designed for those born after 2009 or those who plan to start withdrawals in 2073 or later. Like the existing 2055, 2060, 2065 and 2065 funds, it will be 99 percent invested in the three stock-based core funds with the remaining 1 percent in government securities and bond funds.
The presentation also added some detail to the previous announcement that starting in January 2026, conversions will be allowed from traditional balances—tax-deductible when invested but taxable when withdrawn—and Roth balances—after tax when invested but tax-free when withdrawn so long as certain conditions are met.
That will be available to active participants, separated participants and spousal beneficiaries, it said, with a minimum conversion amount of $500. An online calculator will be made available, which among other things will estimate the taxes owed on the conversion.
A draft version of the calculator page adds that the TSP will report the taxable amount to the IRS for the year in which the conversion is made “but will not be able to withhold any amounts as part of the process to help fulfill your tax obligation.”
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