How to Handle Taxes Owed on TSP Roth Conversions? Use a Ladder

For federal employees, the TSP is one of the most powerful retirement tools available. But too many feds overlook the potential of the Roth TSP and Roth conversion strategies to minimize lifetime taxes, increase flexibility, and protect their retirement income. And this is especially pertinent since starting next year, the TSP will begin allowing in-plan Roth conversions.

The way this is touted to work? You elect to make a Roth contribution and that automatically creates your new Roth TSP account. But there are many aspects to consider – chiefly, that when you move money to this type of account, you have to pay taxes on it (you can still come out ahead, possibly way ahead) but you cannot use TSP monies to cover the tax bill.

Unfortunately, many federal employees do not take advantage of the tax-free growth that the Roth TSP offers. Let’s break down why this happens, how Roth accounts work differently than the traditional TSP, and how federal employees can use Roth conversions to strengthen their retirement plan.

Traditional TSP Came First

The traditional TSP has been around for decades, but the Roth TSP wasn’t introduced until 2012. Because many employees had already been contributing for years before the Roth option existed, the default became “stick with what you know.”

If the Roth TSP had been available from the start, participation would almost certainly be higher. But the fact that it came later means many career employees have built large traditional TSP balances—and now face big tax bills in retirement unless they plan carefully.

Roth vs. Traditional TSP

The difference comes down to when you pay taxes:

• Traditional TSP: You get a tax deduction on contributions now, but every dollar you withdraw in retirement—including earnings—is taxed as ordinary income.
• Roth TSP: You pay taxes up front, but your contributions and growth come out completely tax-free in retirement (as long as you follow the rules).

Most federal employees default to traditional because they assume they’ll be in a lower tax bracket in retirement. But in reality, many end up in the same tax bracket or even higher—thanks to a FERS pension, Social Security, and required minimum distributions (RMDs).

If you’re in the same bracket, the tax deferral of a traditional account isn’t much of a win. That’s where Roth becomes attractive.

The Rising Tax Bracket Problem

Looking ahead, many financial professionals believe tax rates will rise. National debt, Social Security funding issues, and healthcare costs all point toward higher future taxes.

If that happens, traditional TSP balances become even more expensive to withdraw. Roth accounts, on the other hand, are completely insulated from higher tax rates. That makes Roth money a form of tax insurance—helping you preserve flexibility no matter how the tax code shifts.

Employer Match Misunderstanding

Some employees avoid the Roth TSP because they think they’ll miss out on the 5% agency match. Not true. You still get the match regardless of whether you choose Roth or traditional contributions.

The only difference is where the match goes: all matching contributions are placed into your traditional TSP account, not Roth. That means you’ll likely end up with a mix of Roth and traditional dollars, which is fine—you’ll just need to plan withdrawals carefully.

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:

• Reduce the size of your taxable traditional accounts
• Lower future RMDs
• Create a growing bucket of tax-free Roth money

The key is spreading conversions across multiple years—forming what’s known as a Roth conversion ladder.

How a Roth Conversion Ladder Works

A Roth conversion ladder is simply a series of planned Roth conversions over time, designed to gradually shift money from taxable traditional accounts into tax-free Roth accounts.

Here’s an example:

• Age 62 (Retired, no longer earning a salary): Convert $50,000 from Traditional TSP to Roth IRA. Taxes are owed that year, but you stay within your current tax bracket.
• Ages 63–72: Repeat the process annually, converting $30,000–$50,000 per year depending on income, tax brackets, and Medicare premium thresholds.
• Age 73: By the time RMDs begin, your traditional balance is much smaller, lowering required withdrawals and reducing lifetime tax exposure. Meanwhile, your Roth balance has grown tax-free and will never be subject to RMDs.

The ladder strategy smooths out taxes instead of letting them spike later in life.

Other Strategies to Minimize RMD Taxes

In addition to Roth conversions, federal employees can consider:

• Withdrawing from traditional accounts early (before RMDs begin) to reduce future taxable balances.
• Qualified Charitable Distributions (QCDs) from IRAs after age 70½, which can satisfy RMDs while reducing taxable income.
• Balancing withdrawals between Roth and traditional accounts to manage tax brackets strategically each year.

The Bottom Line

There’s no one-size-fits-all answer when it comes to Roth versus traditional contributions. The best strategy depends on your current tax bracket, expected retirement income, and long-term financial goals.

But here’s the takeaway:

• The Roth TSP and Roth conversions give you powerful tools to build tax-free income in retirement.
• A Roth conversion ladder can smooth out taxes, shrink RMDs, and maximize flexibility.
• Federal employees who start early with Roth planning may pay less in taxes over a lifetime than those who delay.

If you haven’t yet evaluated how Roth fits into your retirement plan, now is the time. Building a thoughtful strategy today could save you thousands—maybe tens of thousands—in the future.

Dallen Haws is a Financial Advisor who is dedicated to helping federal employees live their best life and plan an incredible retirement. He hosts a podcast and YouTube channel all about federal benefits and retirement. You can learn more about him at Haws Federal Advisors.

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