Expect quite a few participants to take advantage of the ability to do in-plan conversions beginning in January. Image: Andrey_Popov/Shutterstock.com
By: FEDweek StaffDon’t forget, the TSP is going to allow in-plan Roth conversions beginning in January 2026. This will allow employees to move traditional TSP monies into the Roth TSP much more easily.
Of course, when you convert traditional money to Roth money, you must pay taxes on the conversion. Though we don’t yet know a lot about the mechanics of in-plan conversions, one thing the Thrift Board has already made clear is that the taxes due cannot be taken from the TSP money – all of the conversion amount must go into the Roth TSP and the taxes need to be paid from outside sources.
This is a really big deal, as up to now current employees could not take money from their traditional TSP and move it into a Roth TSP account.
Once these conversions are allowed, any TSP participant may move money from traditional to Roth balances. Currently, if a TSP participant wants to move money from their traditional TSP balance to a Roth account, they’ll have to do it in a Roth IRA. This requires that they roll over the money they want to convert into a traditional IRA and then convert that traditional IRA to a Roth IRA
AND most current employees are not allowed to roll money from their TSP to an outside IRA.
In order to do so, they’ll have to:
- Be a separated employee (e.g., retired, former federal employee, etc.); or
- Have a financial hardship that meets the criteria for hardship withdrawals set out by the TSP; or
- Be over the age of 59 ½.
Expect quite a few participants to take advantage of the ability to do in-plan conversions beginning in January.
Below is how the traditional TSP differs from the Roth TSP
The traditional TSP has been around since 1987:
- Contributions are deductible from your federal income tax.
- The money in the IRA grows tax-deferred.
- When the money is withdrawn, all of it is taxed as ordinary income.
- There is a 10% early withdrawal penalty for money taken out before 59 ½, although the penalty can be avoided by following a life-expectancy based withdrawal strategy for the longer of five years or until you reach the age of 59 ½.
- There is a 25% penalty for failing to take a required minimum distribution after reaching 73 (changing to 75 in 2033). If you promptly correct the missed RMD, the penalty will be lowered to 10%.
The Roth TSP was introduced in 2012:
- Contributions are from already taxed dollars.
- Earnings are tax free if you make qualified withdrawals. In order for a withdrawal to be considered qualified:
- The account must have been open for at least five years; and
- You must be at least age 59 ½.
- There is a 10% early withdrawal penalty for any earnings taken out before 59 ½. Roth TSP withdrawals are viewed as being taken proportionally between contributions and earnings.
- Minimum distributions are not required.
John Grobe is a retired federal employee and retired retirement educator with over 30 years of experience in helping federal employees understand their retirement.
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See also,
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FERS Retirement Guide 2025 – Your Roadmap to Maximizing Federal Retirement Benefits
