What You Need to Know About The Military and Federal TSP In-Plan Roth Conversion
In general, Roth conversions are optimization tools. They refine a strong retirement plan, but they do not repair a weak one.
If cash flow is unstable, debt is high, or retirement savings are inconsistent, a Roth conversion will not solve those issues. It is a tax strategy layered on top of an already disciplined savings plan.
For active duty service members, veterans, retirees, federal employees, and their families, the recent addition of in-plan Roth conversions inside the Thrift Savings Plan creates new flexibility. It also introduces new complexity.
Used correctly, it can reduce lifetime tax exposure. Used carelessly, it can increase taxes unnecessarily. Before acting, review the official guidance at TSP.gov and use the TSP Roth Conversion Calculator to model the impact.
This article covers:
What a Roth conversion is
Why someone may choose to convert
Why someone may avoid converting
The tax consequences
How to determine your marginal tax rate
The specific TSP rules and limits on in-plan conversions
What Is a TSP In-Plan Roth Conversion?
A Roth conversion inside the Thrift Savings Plan moves money from the Traditional TSP to the Roth TSP.
Traditional TSP contributions are made pre-tax. You receive a tax deduction today and pay income tax later when you withdraw the funds.
Roth TSP contributions are made after tax. You pay income tax now, and qualified withdrawals later are tax free.
An in-plan Roth conversion changes the tax status of existing Traditional TSP dollars. The funds remain inside the TSP. You are not rolling money to an IRA. You are electing to pay income tax now on the amount converted.
The converted amount is treated as ordinary income in the year of the transaction.
This is purely a tax timing decision.
Why Someone May Choose to Convert
Expectation of Higher Taxes Later
Many military retirees and federal employees will have multiple income sources in retirement:
Military pension or FERS pension
Social Security
Required minimum distributions for tax-deferred TSP accounts and/or IRAs
Those income streams stack on top of each other. That stacking effect can push retirement income into higher tax brackets than expected.
If your current marginal tax rate is lower than what you anticipate in retirement, converting now may reduce lifetime taxes.
This can be especially relevant in:
Early career military service
Lower GS pay grades
Years with unusually low income, like a deployment to a tax free combat zone.
Transitional years between active duty and civilian employment
Tax Diversification
A well-designed retirement strategy often includes assets across multiple tax categories:
Pre-tax accounts such as Traditional TSP or Traditional IRA
After-tax accounts such as Roth TSP or Roth IRA
Taxable investment accounts
Tax diversification creates flexibility. In retirement, you can choose which bucket to draw from depending on your income needs and tax environment.
Roth conversions allow you to rebalance those tax buckets over time rather than being locked into one structure.
Long-Term Tax-Free Growth
Once converted and held long enough to meet IRS qualification rules, Roth funds grow and can be withdrawn tax free.
For younger service members and federal employees with long time horizons, the compounding benefit can be meaningful.
Why Someone May Avoid Converting
You Are in a High Tax Bracket Today
If you are currently in peak earning years, converting may push additional income into higher tax brackets.
That can increase:
Federal income taxes
State income taxes
Medicare-related income adjustments
Phaseouts of certain deductions or credits
In some cases, waiting for a lower income year may be more efficient.
You Cannot Pay the Tax Using Withholdings From the Conversion Itself
This is one of the most important considerations.
When you convert Traditional TSP funds to Roth, the converted amount becomes taxable income.
Regardless of the fact that TSP does not allow for Federal or State withholding for this conversion, you wouldn’t want to withhold to pay the taxes from the conversion anyway. A withholding to pay taxes when you are younger than 59½ may trigger early withdrawal penalties.
This means, that your options to pay the taxes on the conversion are:
Using a known refund amount on next years tax filing.
Dividing the known tax liability on the conversion by the number of IRS quarters left in the year and make estimated payments from your cash account.
A mix of number 1 and 2.
Pay the liability at once when you file you taxes. Just be aware of your Safe Harbor amount. If you have not withheld/paid enough in taxes throughout the year to meet your Safe Harbor, you may also be penalized for underpayment.
Not recommended, but an option: you can increase your workplace withholding. Just don’t forget to turn it back down next year!
If paying the tax would reduce emergency reserves or require borrowing, the strategy likely does not align with sound planning principles.
If you would like to do an estimate of your taxes with and without the Roth Conversion to help you determine what your refund or liability might be, I recommend the Dinkytown calculator.
You Expect Lower Taxes in Retirement
If you anticipate lower taxable income later, accelerating taxes today may not be optimal.
Examples include:
Planning to retire in a lower-tax state
Expecting reduced income compared to current earnings
Having large deductions projected in retirement
Roth conversions are most effective when tax rates are lower today than they will be tomorrow. Unfortunately, we don’t have a crystal ball so you must ask yourself the question “am I ok with paying taxes at my current marginal rate?” If so, pay the tax and move on.
The Tax Consequences of a TSP Roth Conversion
As mentioned previously, when you complete an in-plan Roth conversion:
The converted amount is added to your taxable income for that year (even though you won’t physically see the money).
It is taxed as ordinary income.
It may affect credits, deductions, and Medicare premiums.
TSP will issue Form 1099-R reporting the taxable amount which you will see the following January or February.
There is no option to reverse the transaction once processed. The decision is permanent. Because the conversion stacks on top of your existing income, careful tax modeling is essential.
Determine Your Marginal Tax Rate Using Form 1040
Before converting, it is important that you understand your marginal federal tax bracket.
To estimate it:
Locate your most recent Form 1040.
Find your taxable income. On recent versions of the form, this appears on Line 15.
Compare that taxable income to the current IRS tax bracket tables for your filing status.
Your marginal tax rate is the rate applied to your next dollar of income.
If your taxable income is near the top of a bracket, even a modest conversion could push part of the amount into a higher bracket. And, do not forget to consider state income taxes separately.
The TSP Roth Conversion Calculator can help model different conversion amounts that would tell you what the added taxes would be so that you can make an informed decision.
TSP In-Plan Conversion Rules and Limits
Participants should always confirm current guidance at TSP.gov before initiating a transaction. Below is a streamlined summary of the key rules governing TSP in-plan Roth conversions.
Minimum Conversion Amount
The minimum Roth in-plan conversion is $500.
There is no maximum dollar limit, other than the leave-behind requirement.
Income limits do not apply to in-plan conversions.
Keep in mind that the amount converted increases your taxable income for the year.
Eligible Traditional Balance Sources
Both contributions and earnings in your Traditional TSP may be eligible for conversion.
When you convert, the amount is taken proportionally from all eligible traditional sources, including:
Your own traditional payroll contributions and earnings
Tax-exempt combat zone contributions and earnings
Agency or Service Matching Contributions and earnings
Agency or Service Automatic 1 percent Contributions and earnings, if vested
Traditional rollover contributions and earnings
If a source is not eligible, such as unvested automatic 1% contributions, it is excluded from the conversion calculation.
Converted funds move into corresponding Roth sources. Restrictions on agency or service contributions continue after conversion. Money moved from those sources into “Roth agency” funds remains ineligible for loans or hardship withdrawals.
Proportional Treatment of Tax-Exempt Contributions
If your Traditional balance includes tax-exempt combat zone contributions, your conversion will include both taxable and nontaxable amounts in the same proportion as your overall Traditional balance.
You cannot choose to convert only tax-exempt contributions.
You owe income tax only on the taxable portion of the conversion.
Leave-Behind Requirement
After a conversion, at least $500 must remain in each of the following Traditional payroll sources:
Your own traditional payroll contributions
Tax-exempt combat zone contributions
Agency or Service Matching Contributions
Agency or Service Automatic 1 percent Contributions, if vested
If any of these sources has $500 or less, it is not eligible for conversion.
Traditional rollover contributions are not subject to a leave-behind requirement and spouse beneficiary participant accounts are not subject to the leave-behind rule.
Frequency Limits
You may complete up to 26 Roth in-plan conversions per calendar year per account. This is not recommended, however. Up to 26 conversions will highly complicate your tax picture as well.
If you have both a civilian and uniformed services account, the 26-conversion limit applies separately to each account.
Conversions cannot be set up automatically. Each transaction must be initiated individually.
Final Thoughts: Optimization Requires Planning
A TSP in-plan Roth conversion is a powerful tool for military members, veterans, retirees, federal employees, and their families.
It can reduce lifetime taxes.
It can improve tax diversification.
It can provide greater retirement income flexibility.
It will not fix weak savings habits, poor cash flow management, or lack of planning.
Roth conversions work best when coordinated with retirement timing, pension projections, state tax planning, and long-term income strategy. Used intentionally, they can be an effective part of a disciplined financial plan.
Disclaimer: This article is provided for educational, general information, and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Read the full disclosure.