TSP In-Plan Roth Conversions – The Complete Guide for Active & Retired Federal Employees
- Tyler Weerden
- Oct 16
- 64 min read
Updated: Oct 19
This article is for information only. Nothing should be considered financial or tax advice. Consult with a professional before implementing Roth conversions.
*Military Uniformed Services – The information in this article does apply to you. However, due to the complexities of Combat Zone Tax Exclusion (CZTE) pay and the related TSP strategies, I only focused on non-combat zone traditional (pre-tax) TSP contributions and Roth (post-tax) contributions. I did not dive into rolling / transferring tax-exempt contributions or converting the growth associated with those contributions.
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Pet Rocks, Beanie Babies, & TSP In-Plan Roth Conversions
They were all the rage. Everyone had to have one. All the cool kids were getting them.
We could easily be talking about the must-have fads of your generation. Instead, I’m referring to the modern-day slinky in the personal finance space – Roth conversions.
A Roth conversion is when you take traditional (pre-tax) dollars and convert them to Roth (post-tax) dollars (more on the nuances of traditional and Roth below).
Without consideration for someone’s unique circumstances, Roth conversions seem to be getting hyped-up by a lot of people, from DIY amateurs to registered professionals. The terms “tax bomb”, “stealth tax”, “tax trap”, and “tax torpedo” are often used to highlight the impending doom linked to possible future tax realities.
Anyone who is part of a personal finance or investing group on social media knows that very few days go by without a thread on Roth conversions. One group member will lay out their financial picture and ask a simple question – “Should I do Roth conversions?” Like academic moths to a spreadsheet flame, group members dive down the rabbit hole, exploring effective tax rates, the “widow’s tax”, “bracket bumping”, IRMAA (she sounds lovely), and other such recurring roles in the Roth conversion tale.
How does this Roth conversion story affect federal employees?
Federal employees have access to the federal version of a private sector 401(k), known as the Thrift Savings Plan (TSP). Just like a 401(k), feds can contribute up to $23,500 ($31,000 for those who will turn age 50 by 12/31) to their TSP in 2025. These contributions can be made with either traditional (pre-tax) dollars or Roth (post-tax) dollars. Contributions can be invested in low-cost, broadly diversified TSP funds and enjoy the magic of compound interest within the tax-advantaged account.
Contribute to your TSP consistently for a long enough period of time and you can easily be a federal employee/retiree millionaire. As of June 2025, there were over 171,000 TSP millionaires.
The Federal Retirement Thrift Investment Board (FRTIB) administers the TSP and began sprinkling Roth conversion breadcrumbs in their meetings starting back in November 2024. In a September 8, 2025 Plan News email from TSP, they confirmed that in January 2026, TSP participants will be able to convert their pre-tax dollars to tax-free Roth.
This has created a flurry of discussions and varying opinions on Roth conversions within the fed family.
If you ask the majority of people in the personal finance world about a Roth conversion, they’ll say something like, “If you’re in the 22% bracket now and you expect to be in the 24% bracket in the future, you should do conversions now to pay tax at a lower bracket.” Unfortunately, this just scratches the surface of the Roth conversion question. It’s just not that simple and there are many other factors that could make Roth conversions no-brainers or a complete disaster.
We're going to cover exactly what a Roth conversion is, when & why you may consider converting, how it may affect your taxes, and the primary factors to consider when deciding to convert or not convert.
Bottom Line Up Front – Ask These Questions
You should explore at least these questions (and probably more) before doing any Roth conversions.
1. Who am I tax planning for? Me, my family, my surviving spouse, my kids, a charity?
2. Do I reasonably expect to have higher taxable income in the future than I do now?
3. Do I currently have room in a lower tax bracket to fill up with conversions?
4. Do I have the cash (outside of retirement accounts) to pay the tax bill for the conversions?
5. Will Roth conversions trigger other tax consequences such as eliminating deductions and/or credits, or trigger additional income related taxes and/or surcharges?
6. Do I have a moderate to high level of income and/or assets that will cause future tax “issues”?
7. Will my projected RMDs create more dollars than I actually need to cover my expenses?
8. Will my projected RMDs push me into a higher bracket unnecessarily?
9. Am I buying health insurance on the ACA marketplace and could lose Premium Tax Credits because of Roth conversions?
10. Am I making Roth conversion decisions with all the proper inputs needed to weigh this decision?
Straight From the Horse’s Mouth
TSP reports on their website that starting in January 2026, you’ll be able to take your traditional (pre-tax) dollars and convert them to Roth (tax-free dollars). If you don’t already have a Roth balance, your first in-plan conversion will create your Roth account.
In a 10/14/25 Federal Register document, the FRTIB proposed the following amendments to 5 CFR Chapter VI, specifically Part 1650 Subpart F – Roth In-Plan Conversions. Note: These are proposed, not final.
§1650.60 Eligibility and general rules for Roth in-plan conversions
(1) TSP may set a maximum number of conversion requests per calendar year.
(2) The participant or beneficiary participant must have a vested account balance of at least $500 at the time of the conversion request.
(3) The total amount of a conversion request must be at least $500.
(4) Participants must retain at least $500 in each of their tax-deferred employee contribution, tax-exempt contribution, agency automatic (1%) contribution, and agency matching contribution balances.
(5) Amounts invested in the Mutual Fund Window cannot be converted unless those amounts are first transferred back into one or more of the TSP core funds.
(6) Administrative holds placed pursuant to section 1690.15 will restrict an individual from requesting a Roth in-plan conversion.
This section covers TSP account freezes related to court orders, victim restitution, participant’s death, fraud, litigation, compliance with applicable law, and for operational reasons such as when correcting processing errors.
From what I could find in publicly available sources, Roth in-plan conversions were first mentioned in the Meeting Minutes from the 11/21/24 meeting of the Federal Retirement Thrift Investment Board (FRTIB).
“Mr. Courtney announced a new feature to be rolled out in January 2026. A “Roth In-Plan Conversion” will allow participants to convert any or all of their Traditional assets to Roth assets. He emphasized that the tax bill triggered by the conversion cannot be paid automatically with Thrift Savings Plan assets. He reported that when the Agency surveyed participants about this feature, 24 percent indicated that they understood the Roth conversion and its tax implications and, of those participants, 35 percent replied they were “likely” or “extremely likely” to use the Roth conversion feature.”
Key Takeaways from the 11/21/24 meeting minutes:
Roth in-plan conversion will allow participants to convert any or all of their traditional TSP to Roth TSP.
The tax bill triggered by the conversion cannot be paid automatically from your TSP.
24% of surveyed participants indicated that they understood conversions and the tax implications.
35% of the 24% replied that they were likely or extremely likely to use the conversion feature.
The Meeting Minutes from the 1/28/25 meeting of the FRTIB mentioned in-plan Roth conversions again.
“Looking ahead, Mr. Davies noted that some participants have expressed interest in Roth-in Plan conversion, so AFS is building a Roth-In Plan conversion and modeling capability for early 2026 implementation.”
Key Takeaways from the 1/28/25 meeting minutes:
Accenture Financial Services (AFS) is currently working on the in-plan conversion and modeling capability.
The target rollout date is early 2026.
The Meeting Minutes from the 5/29/25 meeting of the FRTIB provided additional Roth conversion details.
“Finally, Mr. Courtney provided an update on Roth in-plan conversions. Last November, the TSP announced a plan to allow participants to convert traditional TSP assets to Roth starting in January 2026. As part of this offering, active, separated, and spousal beneficiary participants will be able to make Roth in-plan conversions, with a minimum conversion amount of 500 dollars. To support participants during this rollout, OPE will make calculators available on tsp.gov to help participants estimate conversion tax consequences. Mr. Courtney will share additional updates on this initiative in the fall.”
Key Takeaways from the 5/29/25 meeting minutes:
Active federal employees, separated members, and spouse beneficiary participants will be able to convert pre-tax TSP dollars to Roth TSP dollars.
$500 will be the minimum conversion amount.
Conversion calculators will be available to help participants estimate the tax consequences.
The Basics: Candy in Jars with Wrappers
Roth vs. traditional, IRA vs TSP, taxable, tax-deferred, post-tax, after-tax...it’s not hard to mix this stuff up. Keep it simple by thinking of candy held in different jars with different wrappers.
Candy – These are the investments, the actual things that can grow. This could include a huge variety of things like individual stocks, mutual funds, exchange traded funds, individual bonds, bond funds, cash, gold, etc. For TSP, we’re talking about things like the C, S, I, F, & G Funds.
Jar – These are the accounts like a 401(k), TSP, IRA, Health Savings Account (HSA), 403(b), 457(b), etc.
Wrapper – The wrapper represents the tax treatment. Tax-deferred (traditional), tax-free (Roth & HSA), taxable (brokerage, savings, etc.)
The Basics: Traditional TSP (pre-tax)
If you contribute money from your paycheck to your traditional (pre-tax) TSP, your taxable income is reduced by those contributions. The TSP contributions you make from your paycheck are known as “elective deferrals”.
In 2025, the maximum elective deferral for someone under age 50 is $23,500 (IRC § 402(g)).
If you’ll be age 50-59 on or by 12/31, you can contribute an additional catch-up amount of $7,500 (IRC § 414(v)).
If you’ll turn age 60, 61, 62, or 63 on or by 12/31, you can contribute an additional higher catch-up amount of $11,250. Section 109 of the SECURE Act 2.0 created a higher catch-up which is equal to either $10,000 or 50% more than the regular catch-up contribution limit, whichever is greater. Since the regular catch-up is $7,500, the 50% option is greater ($7,500 x 1.5 = $11,250). This $11,250 is not stacked on top of the $7,500 age 50-59 catch-up, it’s in place of that amount. So, if you’re going to be 60 on or by 12/31, your total elective deferral limit is $34,750 ($23,500 + $11,250). If you’ll turn 64 on or by 12/31, you revert back to the lower catch-up amount of $7,500.
These TSP elective deferral limits are the maximum you can contribute regardless of whether you choose Roth or traditional. This means someone under 50 could contribute $20,000 to Roth and $3,500 to traditional, or any other combination, as long as they don’t go over that $23,500 limit.
The government’s matching contributions DO NOT count against the elective deferral limit.
You get the government match REGARDLESS of whether you contribute to Roth or traditional. If you contribute at least 5%, you’ll get a 5% match (free money).
TSP vs. IRA – Don’t Mix These Up
Your TSP is not the same as an Individual Retirement Account (IRA). These are two completely separate accounts. An IRA is not managed by your employer – it’s managed by you, the individual. This is like having a car and a motorcycle – they can both get you from point A to point B, they both need gas, both have wheels, but they’re not the same vehicle.
With an IRA, in 2025 you can contribute up to a maximum of $7,000, or $8,000 if you’ll turn age 50 by the end of the year. Just like with the elective deferral limit, this maximum contribution of $7,000/$8,000 is for ALL of your IRAs. The contribution limit is the same whether you contribute to one single Roth IRA, one single traditional IRA, or a combination of Roth IRAs and traditional IRAs. It also doesn’t matter how many custodians you use.
Illustration below – If you’re under age 50, you could theoretically contribute $1,000 to a Roth IRA at Vanguard, $2,000 to a traditional IRA at Vanguard, $1,500 to a traditional IRA at Charles Schwab, and $2,500 to a Roth IRA at Fidelity. The IRS views all of your IRAs as one giant bucket, so the contribution limit applies across all of your IRAs.
You CAN contribute to both your TSP and an IRA. The contribution limits do not offset each other. If you’re under age 50, you can contribute $23,500 to your TSP (Roth and/or traditional) and $7,000 to an IRA (Roth and/or traditional).
How Do Traditional TSP Contributions Reduce Your Tax Bill?
There tends to be some confusion regarding the reduction of taxable income, especially when mixing up the TSP with an IRA. With a traditional IRA, your contributions may reduce your taxable income, but that depends on your total income, filing status, and whether or not you and/or your spouse are covered by a workplace retirement plan.
With your TSP, traditional contributions reduce your taxable wages reported in Box 1 of your W-2. From IRS Publication 560: “Don’t include elective deferrals in the wages, tips, or other compensation” box on Form W-2.”
Source: IRS Publication 560
To keep this very simple, if you earn $50,000 in wages and contribute $10,000 to your traditional TSP, your federal taxable wages in Box 1 will be $40,000.
Tax-DEFERRED Growth
Traditional TSP contributions function this way:
(1) Contributions reduce your taxable income in the year of contribution (as explained above via Box 1 on your W-2).
(2) Your contributions and the earnings associated with those contributions grow tax-deferred. This means you don’t pay tax on earnings/growth each year.
(3) When it comes time to withdraw money from your traditional TSP, the distributions (consisting of contributions and earnings) are taxed as ordinary income (the same as your W-2 income).
You must generally wait until age 59.5 to withdraw funds from a traditional retirement plan to avoid incurring a 10% early-withdrawal penalty. However, there are many exceptions to this 10% penalty.
One exception to the 10% penalty is withdrawing money from your traditional TSP after separation from service in the year you turn age 55 or older (regular FERS). Commonly referred to as the “Rule of 55”.
For FERS Special Category Employees (SCE) (who fall under the Qualified Public Safety Employee umbrella outlined in 26 USC § 72(t)(10)), you can withdraw penalty free from your traditional TSP once you reach age 50 (after completing 20-years of service as a SCE), or at any age once you have completed 25-years of service as a SCE.
The “Rule of 55/Rule of 50” only applies to your TSP (the plan of the employer you are separating from), not a previous employer's plan and not an IRA.
The “Rule of 55/Rule of 50” does NOT apply to your Roth TSP.
Big picture: Traditional = don’t pay tax now, pay tax later.
The Basics: Roth TSP (post-tax)
“Roth” is not an investment or an acronym (no need to capitalize ROTH, unless you’re yelling in text). Before Roth became synonymous with tax-free magic, it was simply the last name of someone we all owe a debt of gratitude to. In 1997, Senator William Roth (R-DE) championed the creation of what was then called the “non-deductible tax-free individual retirement account” – very catchy and rolls right off the tongue. Luckily, we just call it a Roth IRA.
When you hear the term Roth, remember, it’s a tax wrapper for your investments. You can invest in an S&P 500 index fund in a traditional IRA and a Roth IRA. You can invest in an S&P 500 index fund in a traditional employer sponsored retirement plan (like the TSP) or a Roth employer sponsored retirement plan. The investment stays the same – an S&P 500 index fund. The difference is the tax wrapper (Roth vs. traditional) around the investment (S&P 500 index in this example).
There are NO income limits that restrict your ability to contribute to the Roth TSP. The highest paid federal employee can have their contributions go into the Roth TSP if they want.
There ARE income limits to contribute to a Roth IRA. Fidelity has some easy-to-understand tables here.
Roth TSP contributions function this way:
(1) You pay tax on the money you contribute. Those dollars are subject to tax, so there is no reduction in your current taxable income.
(2) The money grows tax-free.
(3) Qualified distributions are tax-free. What counts as qualified –
Prong 1: 5-years have passed since January 1 of the calendar year in which you made your first Roth TSP contribution, AND
Prong 2: You have reached age 59½, or have a permanent disability, or are the beneficiary of a deceased Roth IRA owner’s account.
A “qualified distribution” is a two-prong test. You must satisfy both 1 and 2 to get access to your Roth TSP tax and penalty free. There is no “Rule of 55/Rule of 50” for Roth money.
If you want to dive deep on qualified distributions, the 5-year rules (yes, there are two of them), or want to know what happens when you move Roth TSP money to a Roth IRA, this ultimate guide will break things down.
Big picture: Roth = pay tax now, don’t pay tax later.
What is a Roth In-Plan Conversion?
Note: Roth in-plan conversion vs. in-plan Roth conversion – I’ve seen a few sources switch the words, but it doesn’t matter.
Think of your TSP as having two tax buckets inside of it. One bucket for pre-tax traditional money, and the other for post-tax Roth money. A Roth in-plan conversion is when you take money from the traditional TSP bucket and move it into the Roth TSP bucket. You’re taking tax-deferred dollars and converting them into tax-free dollars.
But how? And is it a distribution? Is it a rollover? Is it a conversion?
The Small Business Jobs Act of 2010/P.L. 111-240 (§2112) allows employer retirement plans to offer the ability to do in-plan conversions. 26 U.S. Code § 402A(c)(4) labels this phenomenon, “taxable rollovers to designated Roth accounts”.
All conversions are technically rollovers, but not all rollovers are conversions.
IRS Notice 2010-84 states:
“An in-plan Roth rollover is a distribution from an individual’s plan account, other than a designated Roth account, that is rolled over to the individual’s designated Roth account in the same plan, pursuant to new § 402A(c)(4) of the Code.”
In English: TSP is taking dollars from your traditional TSP bucket and directly rolling/transferring it into your Roth TSP bucket.
IMPORTANT: This is a taxable event. Uncle Sam isn’t going to let you magically sprinkle Roth dust on dollars that have never been taxed.
Tax Time
How Much of the Roth Conversion is Taxable?
100% of the amount of pre-tax dollars you convert to Roth will count as taxable income in the year of conversion.
For example, if you convert $50,000 from your traditional TSP to your Roth TSP – you will owe income tax as if you earned $50,000 in interest or went out and earned $50,000 at a side job (minus the FICA/payroll tax). The converted amount will increase your taxable income.
How could this affect your tax bill? Here are a few examples.
Illustrating the conversion vs. no conversion numbers is not to suggest these conversions are “good” or “bad”. This is simply to show how the Roth conversion increases your taxable income. There are many other variables to consider before deciding “good” vs. “bad”, which we’ll cover.
It’s important to note that the IRS uses the phrase “distribution” synonymously with the term “in-plan rollover” when discussing what we call “in-plan conversions”. It’s not a distribution in the normal sense, where the TSP sends money to your bank. The “distribution” that’s occurring with the conversion is from your traditional TSP to your Roth TSP.
26 U.S. Code § 402A states:
“In the case of any distribution to which this paragraph applies...there shall be included in gross income any amount which would be includible were it not part of a qualified rollover contribution.”
IRS Notice 2010-84 states:
“Any distribution described in § 402A(c)(4) is included in gross income as if it were not rolled over to a designated Roth account.”
“The taxable amount of an in-plan Roth rollover is the amount that would be includible in a participant’s gross income if the rollover were made to a Roth IRA. This amount is equal to the fair market value of the distribution.”
When is the Conversion Taxable?
The amount converted is taxable in the year you do the conversion. It does not matter when you contributed those dollars. If you contributed pre-tax dollars in 2023 and 2024, and then converted those pre-tax dollars to Roth in January 2025 and December 2025, the total converted amount for the January and December conversions will be taxable for tax year 2025 (filed in 2026).
Will Taxes Be Withheld from the Converted Amount?
No. The meeting minutes from 11/21/24 stated, “the tax bill triggered by the conversion cannot be paid automatically with Thrift Savings Plan assets.”
The TSP Plan News from 9/5/25 also states, “You must pay the income tax on the conversion amount using personal funds from another source, such as a savings account. You cannot use part of the conversion amount in your TSP account to pay taxes.”
Moreover, from IRS Notice 2010-84:
“Q-8: Are in-plan Roth direct rollovers subject to 20% mandatory withholding?”
“A-8: No, 20% mandatory withholding under § 3405(c) does not apply to an in-plan Roth direct rollover.”
Is There a 10% Penalty if You’re Under Age 59.5?
No. The 10% penalty does NOT apply to the amount converted. Under the Special Rules and Options section of IRS Notice 2010-84, it states, “However, the 10% additional tax on early distributions will not apply.”
Be careful with this one – this exception to the 10% penalty is for the converted amount.
How could you get snagged with a 10% penalty when doing a Roth conversion?
If you are under age 59.5 and do a Roth conversion from your traditional IRA to your Roth IRA, AND you choose to have the taxes withheld from the conversion, the amount you have withheld from the conversion WILL be subject to ordinary income tax AND the 10% early-withdrawal penalty.
Since TSP isn’t allowing participants to pay the tax bill with TSP assets, this shouldn’t be a tripwire for feds. If for some reason they change their mind and allow TSP participants to have the tax withheld from the converted amount, feds who are not eligible for penalty free distributions should not have the tax withheld from the conversion.
Remember – the IRS is using the term distribution synonymously with “in plan rollover”. Distributions for those who are not eligible for penalty-free TSP withdrawals (e.g., those who haven’t satisfied the “Rule of 55” or SCE “Rule of 50”/25-years of service) will be subject to TAX and PENALTY.
Can You Undo the Conversion?
No. There is no ability to “recharacterize”, “unwind”, or otherwise undo your conversion.
How Can You Pay the Tax on the Conversion?
(1) Additional tax withholding from your paychecks or pension checks.
(2) IRA or TSP distribution with 100% tax withholding (only for those who are eligible for penalty-free distributions).
(3) Estimated tax payments.
Let’s dive-in to these three options.
(1) Additional tax withholding from your bi-weekly paychecks or monthly pension checks.
Simply log into your payroll portal and increase the “additional withholding”. If you estimate that you’ll owe $10,000 in tax and there are 22 pay periods left, increase your withholding by $455. This is probably the simplest method but will make your checks smaller, so it might sting a bit. Make sure you know your true monthly cash flow (income vs. expenses) so that you’re not leaving yourself short by withholding additional taxes from your paycheck.
(2) IRA or TSP distribution with 100% tax withholding.
***WARNING 1 – ONLY if you are already eligible for penalty-free distributions***
***WARNING 2 – This is not a preferred method if you can pay the tax with cash held in your checking, savings, or brokerage account. Remember, you pay tax on the interest, dividends, and capital gains from taxable account (checking, savings, brokerage) each year, which is why these accounts are sometimes referred to as “leaky buckets”. Money drips out in the form of taxable income. Versus your IRA, which gets tax-deferred treatment. Removing dollars from your IRA to pay conversion tax permanently eliminates those dollars from your tax-deferred compounding bucket (unless a 60-day rollover is executed to replace the dollars).
How would this work?
To keep things very simple, let’s say you’re in the 24% tax bracket and convert $10,000 from your traditional TSP to your Roth TSP, resulting in a tax bill of $2,400. What you could do is request an IRA distribution for $2,400 and have 100% withheld for taxes. This means nothing comes to your bank account – the entire amount ($2,400) will be sent to Uncle Sam to pay the tax on your Roth conversion.
However, remember that the $2,400 IRA “distribution” you just fully withheld for taxes is also going to count as taxable income and generate a 1099-R, which means you’ll owe tax on that amount. Tax due...on the dollars...used to pay tax.
See how fun this can be?
To be safe, you could distribute/withdraw and withhold more than $2,400 (even though this is the amount you owe for the Roth conversion), $3,200 for example, and have 100% of that $3,200 withheld to cover the tax on (1) the Roth conversion AND (2) the distribution you’re using to pay the conversion tax.
Here’s a basic illustration of this.
***WARNING...AGAIN***
Only use the IRA/TSP distribution method to pay tax if you are eligible for penalty-free distributions from your traditional IRA/TSP. Don’t use this method if you’re not eligible for penalty-free distributions because that means you’ll not only pay ordinary income tax on this amount, you’ll also pay a 10% early-withdrawal penalty.
Who is eligible for penalty-free traditional IRA distributions?
-Those who have reached age 59.5, or
-Those who are disabled, or
-Those who are the beneficiary of a deceased IRA owner’s account
Who is eligible for penalty-free traditional TSP distributions?
-Those who have reached age 59.5, or
-Those who are disabled, or
-Those who are the beneficiary of a deceased IRA owner’s account, or
-Regular FERS: Those who have separated from federal service in the year they turned age 55 or older (must be age 55 on/by 12/31 – you do not have to actually be 55 on the day you retire/separate), or
-SCE FERS: Those who have separated from service after turning age 50 with 20-years of SCE service or separated from service at any age with 25-years of SCE service (must actually be age 50 upon separation, or have 25-years of SCE service).
Another reason to use withholding as a way to pay tax is the added benefit that the IRS will consider these payments to be paid “ratably”, or evenly throughout the year. This could help eliminate underpayment penalties owed when you have income without tax withholding in one quarter, and don’t pay the proper estimated quarterly tax payment.
60-Day IRA Rollover
There’s also a way to pay the tax via IRA distribution but not recognize the income from the distribution. If you use an IRA distribution with 100% tax withholding to pay the tax, you could then rollover / redeposit that same amount back into an IRA within 60-days. The cash redeposited into the IRA could come from an outside account such as a checking, savings, or brokerage account.
This means that you would accomplish paying the tax (it was still sent to the IRS), but you would not be increasing your taxable income since this would not be considered a distribution once the redeposit is made into an IRA within 60-days.
You are allowed to do this even if you already maxed-out your IRA for the year. The 60-day rollover amount will not result in a 6% excess IRA contribution penalty.
However, it’s important to note that there is a once per 12-month limit on 60-day indirect IRA-to-IRA Rollovers. This once per 12-month limit does NOT apply to:
-Conversions
-Trustee-to-trustee direct rollovers/transfers
-IRA-to-employer plan rollovers/transfers
-Employer plan-to-IRA rollovers/transfers
-Employer plan-to-employer plan rollovers/transfers
(3) Estimated tax payments.
It’s fairly easy to make estimated tax payments online. When you do your Roth conversion, you can estimate the tax owed and go make a payment online to the feds and your state (if applicable).
The U.S. tax system is “pay as you go”. If you owe estimated tax, the IRS expects you to make “quarterly” estimated tax payments throughout the year.
I say “quarterly” in quotes because the payments aren’t actually quarterly. In 2025, they are due April 15th, June 15th, September 15th, and January 15th.
If you will owe $1,000 or more, there are some rules that provide a “safe harbor” from having to make estimated tax payments. If you owe less than $1,000, there is generally no underpayment penalty.
"Safe Harbor” from having to make estimated tax payments:
(1) Pay at least 90% of the tax due on your return THIS year, or
(2) Pay at least 100% of the tax you paid LAST year or
(3) Pay at least 110% of the tax you paid LAST year if your adjusted gross income was more than $150,000 in the prior year.
Form 2210
If you have uneven income throughout the year, you can use Schedule AI (Annualized Income Installment Method) on IRS Form 2210 to report your quarterly income and mitigate underpayment penalties.
1099-R for Tax Reporting
You will receive a 1099-R for the converted amount. While we don’t know exactly how TSP will report/code the in-plan conversion, this is probable.
Box 1 (Gross Distribution): Total amount rolled over/converted
Box 2a (Taxable amount): Total amount rolled over/converted
Box 2b (Taxable amount not determined): Possibly checked. The IRS instructions for filling out 1099-R state, “Enter an “X” in this box if you are unable to reasonably obtain the data needed to compute the taxable amount.” With an IRA custodian like Vanguard, Fidelity, or Charles Schwab, this box will most likely be checked since they are not going to track after-tax basis for you. That’s up to you to determine how much of the conversion consisted of pre-tax dollars vs. after-tax dollars. This is why it’s so important to fill out Form 8606 when contributing non-deductible after-tax dollars to a traditional IRA and when doing conversions.
With TSP and Roth in-plan conversions, it should be very clear that the “gross distribution” in Box 1 is also the “taxable amount” in Box 2a, and therefore, Box 2b does not need to be checked since the taxable amount was determined.
Box 2b (Total distribution): Not checked. This would be checked when one or more distributions within one tax year empties the entire account, leaving a $0 balance.
Box 3 (Capital gain): Not applicable since we’re not dealing with capital gains.
Box 4 (Federal income tax withheld): Blank/$0 since TSP has already said they will not withhold federal taxes from the converted amount.
Box 5 (Employee contributions): Not applicable since this would be reporting a portion of after-tax contributions/basis in this distribution/conversion.
Box 6 (Net Unrealized Appreciation in Employer’s Securities): Not applicable.
Box 7 (Distribution code): G
Box 7 (IRA/SEP/SIMPLE): Not checked since TSP is not an IRA, SEP, or SIMPLE.
Code G in Box 7 is important. This code is for direct rollovers into another qualified plan and in-plan Roth conversions.
Why You May Want to Consider Converting
(1) Lower Tax Rate
You believe that you’ll pay tax at a lower rate today than in the future. This should be based on known facts regarding your situation. Maybe you’re moving to a higher tax state, turning on additional income sources (pension, annuity, etc.), receiving a large inheritance, etc.
(2) Lower Lifetime Tax Bill
You believe that if you pay the tax now, you will end up paying less total lifetime tax. This means you’re considering more than just your marginal tax bracket. While your income may remain steady and you might stay in the same marginal bracket, you know of certain deductions, credits, or other variables that result in a lower lifetime tax bill if you convert today versus leaving the pre-tax assets to grow.
(3) Survivors
You’re trying to reduce taxable income and/or taxes in the future for your spouse once they are forced to file as single after your passing.
(4) Legacy
You want to ensure that your heirs receive tax-free money. Maybe your heirs are already in a high tax bracket and you want to lessen the tax burden on them when they inherit your money. Here’s an idea I’ve seen suggested more than a few times. If you have children who are high earners, and you know that they’re going to inherit pre-tax money from you, sit down with them and talk about Roth conversions today where they pay the tax bill. If you’re in the 24% bracket and they’re a brain surgeon in the 37% bracket, wouldn’t it be a good investment for them to pay the tax now since they’ll be inheriting that money? Now, this requires a LOT of communication, a LOT of trust, and very clear intentions. Just something to think about.
(5) Tax Diversification
You want to build up your tax-free “bucket” to create another lever to pull in the future to manipulate how much taxable income you recognize. What if you’re bumping up against a higher tax bracket, about to trigger an additional tax (NIIT, IRMAA, etc.), or lose a credit/deduction based on your taxable income, but you really want to take money from your TSP or IRA to buy a new car. If you take the money from your Roth TSP or Roth IRA (and it meets the two-prong test for “qualified distributions”), you won’t be recognizing any taxable income and can avoid all those tax dominoes. Having a “Roth lever” to pull can give you income without the tax trigger.
(6) “The Buyout”
You’re not sure if your tax rate will be lower or higher in the future. You’re not even sure if doing Roth conversions now will result in less total lifetime tax...but you’d rather not worry about it and prefer to have more tax-free dollars. You realize that with your traditional pre-tax accounts, you’re in a partnership with the IRS. Uncle Sam is a silent partner in every single pre-tax account you have. Paying the tax now via conversion is the equivalent of a buyout where you become 100% owner.
When is an Optimal Time to Convert?
(1) When tax brackets are low.
You can compare today’s tax brackets to historical tax brackets, but trying to predict future tax brackets is a fool’s errand. There have been people screaming for a decade now that, “tax brackets have nowhere to go but up!” Look at the government debt! The only way to get out of this mess is to substantially raise taxes. And what’s happened? Many brackets went down.
Federal marginal tax brackets under Clinton: 15%, 28%, 31%, 36%, 39.6%.
Federal marginal tax brackets under Bush 2001-2002: 10%, 15%, 28%, 31%, 36%, 39.1%
Federal marginal tax brackets under Bush 2003-2012: 10%, 15%, 25%, 28%, 33%, 35%
Federal marginal tax brackets under Obama 2013-2017: 10%, 15%, 25%, 28%, 33%, 35%, 39.6%.
Federal marginal tax brackets under Trump & Biden: 10%, 12%, 22%, 24%, 32%, 35%, 37%.
Source: Tax Policy Center
Source: Kitces.com
(2) When your taxable income is low.
For many retirees, this is the time after you stop working but before you start collecting Social Security. For federal retirees, it may be ideal to consider conversions after the Retiree Annuity Supplement ends the month you turn age 62, but prior to turning on Social Security. If you know for a fact that your taxable income is much lower today than in the future, conversions may make sense.
This is an example of a federal retiree who is collecting their pension and working a post-retirement W-2 job (“other income”). You can see that once they stop working their W-2 job and only have their pension, there’s a dip in taxable income from age 63-66. At age 67 they turn on Social Security and taxable income goes back up. In this hypothetical example, it might make sense to do conversions and fill up the lower brackets from age 63-66.
(3) When you have the cash (outside of retirement) to pay the tax triggered by the conversion. Using part of the conversion to pay the tax is not as optimal, since less dollars make it into the Roth bucket. As far as we know, TSP participants will not have the option to pay the tax bill with TSP money.
(4) When stock values are down.
If you have 100 shares worth $100,000 and the share value falls 30%, you can convert 100 shares while they’re worth $70,000, paying less tax to convert the same amount of shares. Or, use the same outside money you set aside to pay the tax and convert more than 100 shares for the same tax bill.
(5) When you have a clear picture of your future tax situation.
I personally do not believe someone in their 20’s or 30’s, decades away from retirement, should be doing Roth conversions unless they can convert at the 10% or 12% bracket. Why? There’s too much that can/will change. At that stage in life, you probably don’t have the slightest clue about what your retirement will actually look like. When making a bet that far in advance, you have to be right about both your future life (career, income, expenses, family, inheritances, health/medical issues, etc.) and the outside variables that will change in the decades ahead (tax rates, tax law, investment returns, etc.). The what-ifs at this stage are too great to “solve” the Roth conversion puzzle. I don’t see any harm converting at the 10% or 12% brackets for young people who may be in a low-income transition phase, using Leave Without Pay (LWOP), or some other scenario where they’re in the lowest tax brackets, but expect to be in the higher tax brackets in the future.
When During the Year Should You Convert?
This one can be debated from a few different sides.
Option 1: Convert in January
This means you’ll get your dollars into the Roth side and they’ll have all year to compound and grow tax-free, assuming the market goes up. However, what if the market tanks a month later? You would have been better off waiting to convert once values fell, converting more shares for the same. Another issue with this method is if you have unpredictable income. If you convert in January, thinking you’re in a certain bracket for the year, but then you experience an unexpected surge in income, you could end up paying a much tax rate on that conversion.
Option 2: Convert in November/December
This allows you to have a better sense of your total taxable income for the year and convert more precisely, however, if the market had a positive year, you might have missed out on growth that could have been tax-free. Free advice: Don’t do this. Don’t play the regret game with something you have no control over. Yes, you may have missed out on tax-free growth, but that’s a crap shoot.
Option 3: Convert mid-year
A mid-year conversion will still allow you to take advantage of tax-free growth the rest of the year (assuming the market goes up), while also letting you convert when you have a better idea of your total taxable income for the year, although still not as clear as the tax picture will be towards the end of the year.
Option 4: Convert half in January and half in November/December. Splitting the total conversion half-and-half lets you take advantage of growth on the dollars converted in January (assuming the market goes up), and also gives you a chance to get a clearer picture of your total taxable income towards the end of the year and dial in that second conversion in November/December. Using a simple 50/50 approach takes away the emotion. Come up with the dollar amount you want to convert at the beginning of the year and execute two equal conversions on two dates that you pick at the start of the year (e.g., January 15th and November 15th).
Option 5: Ignore any strategies and just convert when you have the cash to pay the tax.
My take: I personally would not overthink the actual timing of when during the year you do the conversion. If I had to pick one time to convert, I would wait until November-ish to more accurately predict my total taxable income for the year. Playing the mental game of, “I missed out on growth” is just that, a mental game. In the big picture of your financial life, it’s not going to make or break you. You won’t reach financial freedom, or be thrown into financial ruin because you decided to convert in November instead of January.
Why Not 100% Roth?
While it doesn’t show up on the marginal tax bracket table, there is a 0% tax bracket via the standard deduction. If 100% of your retirement income comes from Roth dollars, you’ll have no pre-tax or taxable dollars to “soak-up” the standard deduction. That’s a lost benefit.
Now, for the vast majority of federal employees this won’t be an issue because you’re going to have a taxable pension to soak-up the standard deduction and some of the lower brackets. However, the concept of not wasting low brackets is something to be mindful of.
There are also other deductions that could be strategically utilized when combined with distributing pre-tax dollars from your retirement accounts. Qualified medical expenses for example on Schedule A. If you pay out-of-pocket for medical expenses that exceed 7.5% of your Adjusted Gross Income (AGI), you can deduct that amount on Schedule A. So, if your AGI is $100,000, any non-reimbursed out-of-pocket medical expenses above $7,500 can be deducted. If you or a loved one experience a medical hardship, illness, accident, or long-term care event that requires significant out-of-pocket costs, you wouldn’t want to pay for those with tax-free Roth dollars. You’d be better off distributing traditional dollars and taking advantage of the deduction.
If you’re charitably inclined – why pay tax on your money and give Roth dollars to charities who don’t pay tax? It would be more beneficial to donate pre-tax dollars which results in neither you nor the charity paying tax.
Should You Do Roth Conversions?
The Donald Rumsfeld Roth Conversion Philosophy
Secretary of Defense Donald Rumsfeld’s response to a question at the Pentagon briefing on February 12, 2002 perfectly sums up how you should think about Roth conversions.
“There are known knowns; there are things we know we know.
We also know there are known unknowns; that is to say we know there are some things we do not know.
But there are also unknown unknowns – the ones we don’t know we don’t know.
And if one looks throughout the history of our country and other free countries, it is the latter category that tend to be the difficult ones.”
That’s it.
There are a LOT of unknown factors with Roth conversions. Sure, there are some basic assumptions and variables that we can play with, but to think you’re going to precisely nail this down is an illusion of precision.
I love when I see financial planning software (both free and paid) spit out something like, “You will have $1,284,735.82 in more assets and pay $371,392.19 in less lifetime tax if you convert $57,294.67 this year.
I’m sorry, but that’s crap. I would rate these predictions just slightly more accurate than Miss Cleo and a Magic 8-Ball. To be fair, I get that they have to provide some numeric output, but it just seems silly to try and get super granular with conversions.
In the Roth conversion equation, you can certainly nail down your tax picture this year – that’s the easy part, especially towards the end of the year. It’s the second half of the question that’s the hard part – will you be paying less tax today than in the future if you convert?
If you want the EXACT result of your Roth conversion strategy down to the dollar, I can provide that to you, if you tell me:
1. When you’ll die
2. When your spouse will die
3. How long you’ll work and what your salary will be each year
4. What your retirement account contributions will be each year, and will they be traditional or Roth
5. What will inflation be each year
6. What COLA will your pension receive each year
7. When you’ll claim Social Security
8. What COLA will your Social Security receive each year
9. Will Social Security benefits be reduced
10. What state you’ll live in for the rest of your life
11. What will Congress do with tax rates
12. Will the standard deduction be increased/decreased
13. Will more bonus deductions and/or exemptions be created
14. Will the Required Minimum Distribution (RMD) age be changed again (age 70.5 before 2020, raised to 72 with SECURE Act passage in 2019, and raised again to age 73/75 with SECURE Act 2.0 passage in 2022).
15. Will Congress create new taxes that don’t currently exist (Net Investment Income Tax was created in 2010 as a revenue raising provision for the Affordable Care Act).
16. What return will stocks earn
17. What return will bonds earn
18. What return will cash earn
19. What asset allocation will you have through the remaining stages of your life
20. Will you suffer from poor returns immediately surrounding the start of your decumulation stage
21. Will you receive an inheritance? Will it consist of pre-tax, taxable, post-tax, or a mix of assets with different tax treatment
22. And many other variables that I’m surely not thinking of
Okay, so it’s clear that we’re not going to be able to dial this in perfectly. But what are some considerations to keep in mind when deciding whether or not to do conversions.
Consideration # 1: Who Are You Tax Planning For?
Who are you trying to minimize tax for by doing conversions? What’s the end goal of the conversion?
You have to start with why.
The very first thing you need to determine is who you are doing this tax planning for. It may be for:
(1) You, as a single filer
(2) You and your spouse while you’re both alive (married filing jointly)
(3) The surviving spouse once one of you passes
(4) Your heirs
(5) Charity
While this might seem like an odd place to start, it creates the foundation for your tax planning and can make a HUGE difference.
Here are a few examples:
-You’re single with no children and have a modest retirement nest-egg that you plan to mostly spend down in retirement. You plan to leave your remaining assets to charity. You most likely should not do Roth conversions. Why? You have modest assets and most of them will be used to pay for your living expenses in retirement. Once you pass and your pre-tax traditional assets pass to the charity, neither you nor the charity will ever pay tax on those assets. Why pay the tax just to pass tax-free assets to a charity that wouldn’t pay tax in the first place? What if instead of charity you were going to leave your money to a family member? Even in this situation, it may not make sense to pay the tax to convert, depending on the tax rate.
-You’re 50-years-old, retired from the government with a sizeable COLA-adjusted pension, and you’re married to a younger spouse. You have considerable pre-tax retirement accounts, real estate, and two large Social Security benefits. Your spouse has longevity in their family but you’re not so lucky. The odds are good that your spouse will become a single filer at a young age, moving into the more compressed tax brackets. In order to try to prevent them from getting crushed by taxes as a widow/widower, you decide to do conversions during lower income “gap” / “bridge” years, taking advantage of the Married Filing Jointly tax brackets. In this situation, you’re solving for your spouse.
-You and your spouse have pensions, Social Security, rental income, and built a large pre-tax retirement bucket. You have more than you’ll ever need and want to leave as much tax-free money to your children as possible. Your children work in high paying fields and are already in very high tax brackets. You and your spouse decide to prioritize tax planning for your children, above yourself, and decide to do Roth conversions to pass more tax-free wealth to them. You know conversions may not be optimal for you and your spouse, but they are optimal for your children. This is a prime example of the importance of starting with why and who.
If these were my clients, I would suggest a possible alternative. Skip the conversions, distribute the money, pay the same tax you would have to convert, and spend the money with the family on enjoyment and experiences while you’re alive. Why wait until you’re dead to see them enjoying that gift?
Consideration # 2: Level of Income & Assets
If you have, or reasonably expect to have considerable assets and income, you’re more likely to run into a tax “issue” later in life, especially once Required Minimum Distributions (RMDs) begin. I say “issue” because we’re talking about being forced into higher brackets because you have such a large pre-tax balance...this is a “problem” that many people would love to have, so I don’t want to paint RMDs as “bad” or a true “problem”. Just something to consider.
When it comes to level of income and assets, this is a highly personal analysis of your current income, career trajectory, expected future income, current and future expenses, current assets, current debt, pre-tax account balances, expected future contributions, assumed investment growth rate, etc. This is really the only way to look into the future and determine if you’re likely to be forced into higher tax brackets.
If you have low to moderate levels of income and assets, you may not benefit at all from doing Roth conversions. Or, the benefit is going to be so slim that it’ll take multiple decades to recoup the benefit to offset the tax cost.
How much is “considerable” versus “low” or “moderate”. It’s all relative, and I can’t possibly assign values. If you have lots of assets but you also have lots of expenses, it’s not as much of an issue since you’ll most likely be spending down your investment portfolio. If you have a moderate level of assets but plan to keep working, saving, investing, and not spend down your pre-tax balance down, you may have more reason to convert.
I personally do not believe that the majority of retirees are going to face a “tax issue” that can/should be solved by Roth conversions. I think it’s a little oversold and hyped-up to people who will be in the same or a lower tax bracket once they retire.
While these numbers don’t mean much by themselves – they can provide a little perspective.
According to Empower (measured by Empower Personal Dashboard users reporting 401(k) & IRA)
The average retirement savings balance is $491,022.
For those in their 50’s: Average = $970,570 / Median = $441,611
For those in their 60’s: Average = $1,148,441 / Median = $539,068
According to Vanguard (measured by Vanguard defined contribution account balances):
For those age 45-54: Average = $168,646 / Median = $60,763
For those age 55-64: Average = $244,750 / Median = $87,571
For those age 65+: Average = $272,588 / Median = $88,488
According to Fidelity (measured by Fidelity accounts and managed corporate defined contribution plans)
For those age 61-70: Average 401(k) = $249,300 / Average IRA = $257,002
For those age 45-60: Average 401(k) = $192,300 / Average IRA = $103,952
For those age 29-44: Average 401(k) = $67,300 / Average IRA = $25,109
To be fair, if you’re reading this, you probably are not “average”. You most likely save and invest more than your peers and tend to be more financial minded...some might say thrifty or frugal.
I’ll also add that people with higher levels of income and assets are better positioned to convert because they are more likely to have the cash (outside of retirement accounts) to pay the tax bill.
Consideration # 3: Marginal & Effective Tax Rates
Don’t just think about your marginal tax bracket, instead, think about your total taxable income and your effective tax rate. Knowing that you’re in the 22% bracket now based on your W-2 income, and are projected to be in the 22% bracket 10-years from now based on assumed W-2 income raises, doesn’t paint a complete picture.
Remember, the tax brackets are progressive, meaning the more income you have, the higher the bracket you creep into. However, not every dollar you earn is taxed in that bracket. If you’re in the 22% bracket and then earn $1 into the 24% bracket, you’re only paying 24% on that $1, not all of your income.
Here’s how it works for a single filer with $80,000 worth of taxable income (after applying the $15,750 standard deduction).
$0 - $11,925 (x) 10% bracket = $1,192.50 tax due ($11,925 out of the total $80,000 is taxed at 10%).
$11,926 - $48,475 (x) 12% bracket = $4,386 tax due ($36,550 out of the total $80,000 is taxed at 12%).
$48,476 - $80,000 (x) 22% bracket = $6,935.50 tax due ($31,525 out of the total $80,000 is taxed at 22%).
Total tax due = $12,514
Effective tax rate 1 = 15.64% ($12,514 divided by $80,000 taxable income), or
Effective tax rate 2 = 13.07% ($12,514 divided by $95,750 gross income, $80,000 plus $15,750 standard deduction)
Source: The Tax Foundation
When most sources reference your “effective tax rate”, they’re talking about your total federal tax (line 24 on Form 1040) divided by your taxable income (line 15 on Form 1040). Let’s look at an example of two people in the 22% federal marginal tax bracket with very different effective tax rates.
If both Tanner and Abbey convert $50,000 from their traditional TSP to their Roth TSP – they will experience different outcomes and costs to convert, even though they are both starting in the 22% federal marginal tax bracket based on their W-2 income alone.
You can see that it cost Tanner $11,000 in additional tax to convert $50,000. This makes sense – he is squarely in the 22% tax bracket, so 22% (x) $50,000 = $11,000 tax bill.
But what happened with Abbey? Why did her $50,000 conversion cost her $11,978? What happened is her $50,000 conversion pushed some of her taxable dollars into the 24% tax bracket.
This is why it’s important to understand marginal tax bracket management. Many people will convert up to a certain threshold, filling up their tax bracket. This makes sense because while you might be okay paying 24% tax to convert today, you might not be okay paying 32% to convert dollars in the next bracket. Once many people get into the higher tax brackets, it’s harder to justify conversions. However, it’s all relative. If you know for a fact that you’ll eventually be in the 37% bracket, converting at 32% might look like a steal.
Don’t forget about state tax. If you live in California today but know you’re retiring to Texas in a few years, it might make more sense to wait and convert once your state tax is lower/eliminated.
Consideration # 4: Triggers & Phase-Outs
The decision to do Roth conversions cannot be made in a vacuum. While you may think you’re simply solving the equation of income tax rate today versus income tax rate tomorrow, there are tax ripple effects that are caused by increasing your income.
Many provisions of the tax code revolve around Modified Adjusted Gross Income (MAGI – I say “Maggie). And in true government fashion, MAGI isn’t as simple as you would think. There are many different MAGIs for different purposes.
Want to know if you can make a Roth IRA contribution? That’s based on one calculation of MAGI.
Want to know if you can deduct your traditional IRA contribution? That’s a different MAGI.
Want to know if you’ll have to pay Medicare Part B surcharges? Yup...different MAGI than the first two.
Want to know if you’ll get Premium Tax Credits for ACA health insurance? Yet another MAGI.
When it comes to Roth conversions, there are MAGI formulas that will be impacted by the income you’re adding from the conversion.
Credits that are affected by increased MAGI include:
Child Tax Credit
Child and Dependent Care Credit
Adoption Credit
American Opportunity Tax Credit (AOTC)
Lifetime Learning Credit (LLC)
Savers Credit
Earned Income Tax Credit (EITC)
Premium Tax Credits (PTC) for health insurance purchased on the ACA marketplace
Deductions that are affected by increased MAGI include:
Traditional IRA deductibility (if covered by a workplace retirement plan)
Student Loan Interest Deduction
Rental real estate loss deduction
U.S. Savings Bond Education Interest Exclusion
Many provisions of the One Big Beautiful Bill Act (OBBBA) also have income phase-outs. If you want to dive into the OBBBA, I have a separate article here.
This chart shows a few examples of tax credits and deductions that are reduced (“phased-out”) by your level of income.
Let’s say you’re a single filer with a MAGI of $150,000. You’ve decided you want to “rip the band-aid off” and do a $100,000 Roth conversion in 2026, pushing your MAGI to $250,000. Look for any green bars between the $150,000 – $250,000 income line. With this example, you would be completely phased-out of the Child Tax Credit ($50 reduction for every $1,000 over $200,000), the age 65+ bonus deduction (completed eliminated for single filers with MAGI at/above $175,000), and most of the overtime deduction (for every $1,000 above the single threshold of $150,000, a reduction of $100 applies).
What about a married couple where both individuals are age 65+ who also have $150,000 MAGI and want to convert $100,000? The entire $12,000 age 65+ “bonus” deduction/exemption would be eliminated (each spouse has their separate $6,000 bonus deduction phased-out at the same time by the same income) along with their ability to deduct auto loan interest ($200 reduction for every $1,000 above the $200,000 phase-out start for MFJ).
To make matters more complicated, some of these credits/deductions end after a few years. So perhaps it would be more beneficial to delay Roth conversions to take advantage of the current benefits.
These are all trade-offs. Could it be worth losing one of the deductions/credits above to do conversions? Maybe. Could it end-up being a bad decision? Maybe. Who really knows whether it’ll be the right decision? The people with the time machines.
In addition to losing credits and deductions, you could also trigger additional taxes and/or surcharges, which brings us to 4a (NIIT), 4b (IRMAA), and 4c (Social Security tax).
Consideration # 4a: Net Investment Income Tax
Doing a Roth conversion could also trigger an additional 3.8% Net Investment Income Tax (NIIT) on your net investment income. NIIT applies to taxable interest, dividends, capital gains, annuity income, royalties, rental income (even if owned inside a pass-through entity like an LLC), rental property capital gains/profit, once your Modified Adjusted Gross Income (MAGI) reaches the below thresholds.
NIIT doesn’t apply to W-2 wages, retirement income (TSP, IRA, pension, etc.), Social Security income, self-employment income, life insurance proceeds, tax-exempt interest from tax-exempt bonds, unemployment, VA disability benefits selling business assets, income from a business that you “materially participate” in, short-term rental real estate business income when you “materially participate”, and real estate income for those with “real estate professional” status engaged in a business activity.
The additional 3.8% NIIT is triggered once MAGI exceeds:
$200,000 (single filers & head of household)
$250,000 (married filing jointly)
$125,000 (married filing separately)
The 3.8% NIIT applies to the LESSER of either:
(1) Your net investment income, or
(2) The amount your adjusted gross income went over the threshold.
The 3.8% NIIT is in addition to any capital gains tax owed.
The current long-term capitals brackets are 0%, 15%, and 20%. A long-term capital gain is any profit generated by an asset you held/owned for more than one year. If you hold the asset for one year or less, the profit will be subject to short-term capital gains tax, which is the same tax applied to your ordinary income (10%, 12%, 22%, 24%, 32%, 35%, & 37%).
Source: The Tax Foundation
Let’s look at how a conversion can trigger NIIT.
If you’re considering doing conversions and also have net investment income, you may want to convert up to the NIIT threshold or delay realizing capital gains in a future year when you don’t do Roth conversions.
Consideration # 4b: IRMAA
Who the heck is IRMAA and why does everyone always bring her up when talking about Roth conversions.
IRMAA stands for Income Related Monthly Adjustment Amount. What is it? It’s a “surcharge”, or additional premium you have to pay on your Medicare Part B and Part D premiums once your income reaches a certain level.
IRMAA is not particularly nice. Unlike the other phased reductions and taxable zones that we’ve talked about, IRMAA is a cliff. This means if you go just $1 over an IRMAA threshold, you’re stuck paying the larger premium surcharge.
When looking at your 1040, MAGI for IRMAA purposes is AGI (line 11) plus tax-exempt interest (line 2A).
To make things a little more complicated, the IRMAA surcharge you pay in the current year is based on your MAGI from 2-years ago. Why 2-years ago? That’s the most recent tax return available at the time the new rates are announced. For example, the Centers for Medicare & Medicaid Services announced the 2025 IRMAA limits towards the end of 2024. The most recent tax return available at the end of 2024 was the tax return for calendar year 2023, filed in 2024. Therefore, your calendar year 2023 income (MAGI) determines your calendar year 2025 IRMAA surcharge.
2025 brackets based on 2023 income.
You can see in the chart above, a married couple filing jointly with IRMAA MAGI of $212,000 or less would each pay $185/mo. for their Part B premium. This is the regular Part B premium cost with no IRMAA surcharge.
The Cliff: If they converted just $1 to Roth in 2023, pushing their MAGI to $212,001, they would each pay $259/mo. for their Part B premium in 2025. Going over the cliff by $1 cost them an additional $1,776 in premiums ($4,440 premium only vs. $6,216 premium + IRMAA surcharge).
What if they converted $100,000? This $100,000 Roth conversion would not only cost them $24,000 in income tax to pay for the conversion, it would cost them an additional $4,440 in IRMAA surcharges ($4,440 premium only vs. $8,880 premium + IRMAA surcharge).
Not to mention the fact that they probably have some form of net investment income (interest, dividends, capital gains, rental income, etc.) that will now be subject to 3.8% NIIT. Not to mention if they’re both age 65+ they also completely phased-out and lost the $12,000 senior bonus deduction. Not to mention they are not allowed to write-off any auto loan interest.
You can see how quickly Roth conversions can push multiple tax dominoes over.
Life-Changing Events
What if you were working a high-paying job in 2023 that you no longer have? Or what if you had a spouse’s income on your 2023 tax return but your spouse passed away since then? It seems unfair that your 2025 IRMAA surcharge is based on your 2023 income that’s no longer a reality.
Like all things in the government, there’s a form for that.
Using Form SSA-44, you can request an adjustment to your IRMAA based on one of the qualifying life-changing events.
Source: SSA-44
Consideration # 4c: Social Security Taxability
Roth conversions could also cause an increase in the portion of your Social Security that’s subject to tax.
For most federal retirees, this is not going to be a factor. Why? Because your pension (referred to as an “annuity” by OPM) income already pushes your Social Security income into the zone where 85% of your Social Security benefit is going to be added to your taxable income.
Don’t confuse this with an 85% tax rate – that’s not what this means.
It just means that up to 85% of your total Social Security benefit may be added to your other taxable sources (pension, IRA distributions, interest, etc.) to calculate your total adjusted gross income. If you received $10,000 Social Security income, the maximum amount that may be subject to federal income tax would be $8,500.
Many feds retiring with a pension are going to easily exceed the $34,000/$44,000 threshold.
50% of your Social Security benefit may be taxable if you are:
Single, Head of Household, or Qualifying Surviving Spouse with $25,000 - $34,000 of income.
Married Filing Jointly with $32,000 - $44,000 of income.
Married Filing Separately and lived apart all year with $25,000 - $34,000 of income.
85% of your Social Security benefit may be taxable if you are:
Single, Head of Household, or Qualifying Surviving Spouse with more than $34,000 of income.
Married Filing Jointly with more than $44,000 of income.
Married Filing Separately and lived together at any time during the year with more than $0 of income.
So, how exactly do you figure out how much of your benefit is subject to federal tax?
The gross amount of Social Security paid to you is going to be reported in Box 5 on the SSA-1099 you receive. This gross amount goes on line 6a of Form 1040. The taxable portion gets reported on line 6b of Form 1040.
But how do you determine the taxable amount?
First, start by figuring out your “provisional income”, sometimes called “combined income”.
+Adjusted Gross income (Form 1040, line 11)
+Non-taxable interest (Form 1040, line 2a)
+1/2 of your Social Security benefit reported in Box 5 on SSA-1099
= “Provisional Income” / “Combined Income”
When calculating provisional/combined income, do not exclude/reduce your income by (1) interest from qualified U.S. savings bonds, (2) employer provided adoption benefits, (3) interest on education loans, (4) foreign earned income, (5) foreign housing, or (6) income earned by bona fide residents of American Samoa or Puerto Rico.
You now have your provisional income.
Next, apply the 0%, 50%, and 85% taxable amounts and see if it’s more or less than 85% of your total benefit. The LESSER number is the amount of Social Security that is added to your taxable income.
If you don’t want to do all this math yourself, you can simply use an online calculator, like this one from Dinkytown.
Here are examples with a single tax filer and a couple filing jointly.
Consideration # 5: RMDs & the “First Dollars Out”
The government truly believes that all good things must come to an end. One of those “good things” that eventually ends...tax deferral.
For most of your life, you’ve enjoyed the benefits of tax-deferred growth in your traditional retirement accounts. After all, these are “pre-tax” accounts that have not been taxed yet. Not to be morbid, but Uncle Sam wants to start getting some of that tax from you before you die.
How do they force tax payments on tax-deferred dollars? Required Minimum Distributions (RMDs). They are exactly what they sound like. Forced distributions from your pre-tax accounts.
RMDs apply to:
-Traditional IRA
-SEP IRA
-SIMPLE IRA
-Traditional 401(k)
-Traditional TSP
-Traditional 403(b)
-Traditional 457(b)
-Profit sharing plans
-Other defined contribution plans
There are no RMDs for a Roth IRA, Roth employer plans, or taxable brokerage accounts. This is another reason why people consider doing Roth conversions.
Note: Inherited Roth IRAs and inherited Roth employer plans may be subject to RMDs based on the type of beneficiary (eligible designated beneficiary vs. non-eligible designated beneficiary vs. non-designated beneficiary), the distribution method (“stretch”, 10-year rule, etc.), and the date of death (pre-SECURE Act vs. post-SECURE Act).
Key points:
The RMD is a minimum – you can certainly withdraw more than that amount.
The RMD amount is included in your taxable income (just like a Roth conversion).
If you have multiple IRAs, you can combine/aggregate each individual account’s RMDs and just distribute one lump sum from one IRA to satisfy the RMDs for all of the IRAs.
If you have multiple 403(b) plans, you can combine/aggregate each individual account’s RMDs and just distribute one lump sum from one 403(b) to satisfy the RMDs for all of the 403(b) plans.
You cannot aggregate RMDs from multiple TSP, 401(k), or 457(b) plans.
You cannot combine/aggregate RMDs between employer plans and IRAs.
If you’re still working for an employer, they may allow you to delay taking the RMD from their plan while you’re still working. This “still working exception” only applies to the employer plan administered by the employer you’re currently working for, not old employer plans. This exception also only applies if you’re still working as of 12/31 of the year you’re using the exception for.
When Do You Have to Take Your First RMD?
Your first RMD is based on your date of birth.
If you were age 70.5 prior to 2020, your RMD age is 70.5.
If you turned age 70.5 after 12/31/2019, your RMD age is 72.
If you turned 72 on or after 1/1/23, your RMD age is 73.
If you’ll turn 74 after 12/31/32, your RMD age is 75.
Born before/in 1950 = age 72.
Born 1951-1959 = age 73.
Born in/after 1960 = age 75.
When Do You Really Have to Take the RMD
You have until your Required Beginning Date (RBD) to take your first RMD. Your RBD is April 1 of the year FOLLOWING the calendar year in which you reach RMD age. However, if you delay your first RMD and pay it by April 1 of the year following the year you reach RMD age, you’ll have to take two RMDs in that second year – the year 1 RMD you delayed until 4/1 and the year 2 RMD by 12/31 of that same year.
Here’s an example from the IRS website: “John reached age 72 on August 20, 2022. He must receive his 2022 required minimum distribution by April 1, 2023, based on his 2021 year-end balance. John must also receive his 2023 required minimum distribution by December 31, 2023, based on his 2022 year-end balance.”
How much is the RMD?
The RMD amount is based on your account balance and your current age/life expectancy. For unmarried individuals and married individuals whose spouses aren’t more than 10-year younger, you’ll use the Uniform Lifetime Table to find your life expectancy factor. You’ll take your prior year balance as of 12/31 and divide that by your life expectancy factor.
Source: Table III (Uniform Lifetime)
Age 72 - $1,000,000 account balance = $36,496 RMD
Age 97 - $1,000,000 account balance = $128,205 RMD
This is what worries a lot of people and causes them to consider Roth conversions.
Let’s say you’re a dual federal Special Category Employee couple retiring at age 50. You and your spouse have been diligent savers and have amassed $2 million in combined traditional TSP assets. You also have taxable pensions and taxable Retiree Annuity Supplement until age 62. You have no need to withdraw money from your TSP, but figure you’ll withdraw $40,000/year for enjoyment, splurge items, vacations, etc. This $40,000 will increase by 3% each year for inflation. Assuming a 6% long-term growth rate from age 50-75, that leaves them with a TSP balance of $5.6 million at age 75.
Using the Uniform Lifetime Table, the minimum amount they would be forced to withdraw from their traditional TSP would be roughly $227,642. This is on top of their pensions that have been growing for 25-years with COLAs, on top of their other retirement accounts, and on top of their Social Security income. Could this create a large influx of taxable income that they don’t even need? Could it trigger IRMAA and other tax consequences? Absolutely.
We also have to once again accept the fact that estimating RMDs 15, 20, 25-years down the road is a very difficult thing to do – if not impossible. Most likely, your life and financial plan is going to look significantly different even 5 or 10-years from now. We have no idea what investment returns will be, what your actual distribution need will be, and therefore we really don’t know what your account balance will be. If you run conservative estimates and foresee a large tax problem, conversions may be the right answer. If you have to instead assume 15% stock market returns every year to begin having an RMD issue, it’s not as clear-cut that you need to start converting today.
First Dollars Out – RMDs & Conversions in the Same Year
If you’re going to do Roth conversions in the same year you have to take an RMD, you need to know that the first dollars taken from your pre-tax account will be your RMD. Moreover, RMDs CANNOT be rolled over / converted.
The only way to satisfy an RMD and not recognize any income is by executing a Qualified Charitable Distribution (QCD). QCDs can only be done from an IRA and only by individuals who are over age 70.5. Yes, that’s correct. The QCD age is the old RMD age – they are no longer the same, which makes it nice and confusing. A QCD is where the RMD is sent directly from the custodian to a qualified charity – it never comes to you and you don’t receive anything in exchange for the donation. QCDs can be made from inherited IRAs, but only if the beneficiary is 70.5 – it does not matter if the original account owner was 70.5.
Other than QCDs, your RMD is taxable income to you. It’s worth repeating – you cannot convert / rollover your RMD.
Here’s the rule straight from the IRS:
“For example, if an employee is required under section 401(a)(9) to receive a minimum distribution for a calendar year of $5,000 and the employee receives a total of $7,200 in that year, the first $5,000 distributed will be treated as the required minimum distribution and will not be an eligible rollover distribution, and the remaining $2,200 will be an eligible rollover distribution if it otherwise qualifies.”
If you turn RMD age on December 1, 2025, but want to do a Roth conversion in 2025 before you actually turn RMD age, you must first take your RMD for the year. In the year you turn RMD age, the full RMD amount must be satisfied before any rollovers/conversions are done.
Consideration # 6: Health Insurance & the Affordable Care Act
For many federal employees this is not a factor they need to consider, due to the fact that active and retired federal employees (who separated with an immediate pension/annuity) have health insurance through the Federal Employee Health Benefits program (FEHB).
However, especially this year, many of our colleagues were subject to Reductions in Force (RIF) or voluntarily separated from service without FEHB eligibility.
Just to recap FEHB eligibility for separated employees.
1. You must be eligible to retire with an immediate annuity. This means your pension/annuity begins to accrue no later than one month after the date of your final separation. Note: Deferred (not to be confused with postponed) retirements are NOT eligible for FEHB coverage.
2. You must have been continuously enrolled in any FEHB plan for the 5-years of service immediately preceding retirement, or if less than 5-years, for all service since your first opportunity to enroll. This does not mean that you had to have the same exactly FEHB health insurance plan for all 5-years before retirement. It just means that you were covered by any FEHB health insurance plan for those 5-years. Coverage under a family member’s FEHB plan also satisfies this prong and makes you eligible.
If you’re seeing conflicting information on social media or hearing something contradictory around the water cooler regarding FEHB eligibility in retirement, read what OPM has to say.
So, if you’re a separated federal employee WITHOUT any FEHB health insurance and you have NOT secured health insurance through a new employer or other avenues, you may be shopping for health insurance on the Health Insurance Marketplace. You may also hear this referred to as ACA (Affordable Care Act) health insurance or “Obamacare”.
When you purchase health insurance via the marketplace, you may qualify for Premium Tax Credits (PTC), reducing your overall out-of-pocket cost. These credits offset the monthly premium you pay. Your eligibility for PTC depends on your income and the plan you’re enrolled in. In order to be eligible for PTC, you must have income at least as high as 100% of the federal poverty level (FPL). If your income is below this 100% FPL threshold, you generally will not qualify for PTC under Marketplace plans, but may qualify for other state sponsored benefits.
What’s happening in 2026.
Previously, if your income was above 400% of the FPL, you could still get some amount of PTC. Now, the “cliff” has returned, meaning if you exceed 400% of the FPL, you will not qualify for PTC.
Use this calculator to get a feel for where you fall on the FPL.
Why does this matter for Roth conversions? Remember, conversions will boost your income and could therefore make you ineligible for PTC.
Modified Adjusted Gross Income (MAGI) for Premium Tax Credit purposes is:
This MAGI is BEFORE the standard deduction/itemized deductions are applied.
***THIS INFORMATION IS ACCURATE AS OF 10/15/25***
The current government shutdown involves impasses regarding the enhanced Premium Tax Credits that were increased during the pandemic. Individuals who were already eligible for PTC saw lower premiums, and individuals who were not eligible before, found themselves eligible with the enhancements. As of right now, the enhanced PTC are set to expire at the end of 2025.
5-Year Rule & 10% Penalty for Taxable Converted Amounts
If any portion of a Roth in-plan conversion is withdrawn from the Roth TSP within 5-years of January 1 of the year of the conversion, a 10% penalty / additional tax will apply unless another exception applies such as being age 59.5.
This 5-year rule only determines if you’ll pay a 10% penalty on taxable converted amounts.
This 5-year rule only applies to those under age 59 ½. If you’re over age 59 ½, you can erase the idea of a 10% conversion penalty from your brain. Ordinary income tax may still apply to the earnings portion if you didn’t satisfy both prong 1 and prong 2 for “qualified distributions”– but the 10% penalty is gone.
Bottom line: If you convert traditional dollars to Roth dollars, and you’re under age 59 ½, you cannot withdraw those converted dollars without paying a 10% penalty on the taxable converted amount until 5 tax years have passed. The clock starts January 1 of the year you did the conversion.
IMPORTANT: Each individual taxable conversion has its own separate 5-year clock and distributions are made on a First-In First-Out (FIFO) basis.
IRS Notice 2010-84 points out this 5-year rule for the in-plan converted amount.
“Q-12. Are there any special rules relating to the application of the 10%
additional tax under § 72(t) for distributions allocable to the taxable amount of an
in-plan Roth rollover made within the preceding 5-years?”
My Translation: Does a 10% penalty apply to converted dollars if distributed within 5-years of the conversion?
“A-12. Yes, pursuant to §§ 402A(c)(4)(D) and 408A(d)(3)(F), if an amount allocable to the taxable amount of an in-plan Roth rollover is distributed within the 5-taxable-year period beginning with the first day of the participant’s taxable year in which the rollover was made, the amount distributed is treated as includible in gross income for the purpose of applying § 72(t) to the distribution.”
My Translation: Yes – If you distribute any converted dollars (that were taxable when converted) from the plan within a 5-year period beginning January 1 of the year the conversion took place, the 10% penalty (referred to as “applying 72(t)”) does apply. Why are they saying “for the purpose of applying § 72(t)”? Because Section 72(t) of Title 26 of the U.S. Code outlines the rules surrounding the “10-percent additional tax on early distributions from qualified retirement plans.”
“The 5- taxable-year period ends on the last day of the participant’s fifth taxable year in the period. Thus, if a participant withdraws an amount that includes $6,000 allocable to the taxable amount of an in-plan Roth rollover made within the preceding 5-years, the $6,000 is treated as includible in the participant’s gross income for purposes of applying § 72(t) to the distribution.”
My Translation: Let’s say in December 2026 you convert $6,000 from your traditional TSP to your Roth TSP. The 5-year conversion clock starts January 1, 2026.
12/31/2026 – Taxable year 1 complete
12/31/2027 – Taxable year 2 complete
12/31/2028 – Taxable year 3 complete
12/31/2029 – Taxable year 4 complete
12/31/2030 – Taxable year 5 complete
1/1/2031 – The 10% penalty period for that $6,000 conversion is over.
“In such a case, the participant would owe an additional tax of $600 unless an exception under § 72(t)(2) applies.”
My Translation: In our example above, if you distributed/withdrew any portion of the $6,000 you’re your Roth TSP within the 5-year window from 2026 – 12/31/2030, you’d pay the 10% penalty (unless another exception applied – like being age 59.5).
“The 5-year recapture rule in this Q&A-12 does not apply to a distribution that is rolled over to another designated Roth account of the participant or to a Roth IRA owned by the participant.”
My Translation: The 10% penalty would NOT apply if you took that $6,000 and either (1) rolled it into another Roth employer plan or (2) rolled it into a Roth IRA. Rolling/transferring the money to another Roth account would NOT trigger the 72(t) 10% penalty because you didn’t distribute/withdraw the money into your bank account.
“However, the rule does apply to subsequent distributions made from such other designated Roth account or Roth IRA within the 5-taxable-year period.”
My Translation: Regardless of whether you keep the $6,000 in your TSP or move it to another Roth employer plan or move it to a Roth IRA, the 5-year clock is still attached to those dollars. If you rolled the $6,000 from your Roth TSP to your Roth IRA and then distributed/withdrew those $6,000 converted dollars from the Roth IRA prior to 1/1/2031, a 10% penalty would apply since the 5-year clock is still attached to those dollars.
Here's a big thing to remember – Roth IRAs have ordering rules.
As mentioned in IRS Publication 590-B and in A-8 of 26 CFR § 1.408A-6, when you withdraw money from a Roth IRA, money comes out in this order:
(1) From regular contributions
(2) From conversions and rollover contributions (first-in-first-out)
(a) Taxable portion first, then
(b) Non-taxable portion
(3) From earnings.
The first dollars distributed from your Roth IRA are contributions, which are always tax & penalty free regardless of age or reason. Only after all of your contributions have been distributed do you start to tap into the conversion bucket. Only after all of your contributions and conversions have been distributed do you start to tap into the earnings bucket.
As you make contributions, they are added to prior years’ contributions that you haven’t withdrawn. As you build up your contributions, the amount you can distribute tax and penalty free also builds up (orange).
You’ll see in the example above, from 2024-2028, $29,000 was contributed to all of the Roth IRAs; this means $29,000 could be withdrawn tax and penalty free. In 2029, $5,000 is withdrawn from the Vanguard Roth IRA which reduces the total contributions that can be withdrawn by $5,000 (down to $24,000). In 2030, an additional $3,000 is withdrawn from the Vanguard Roth IRA, but $5,000 is contributed towards the Schwab Roth IRA. The net effect is $2,000 added to the contribution bucket, resulting in $26,000 total Roth IRA contributions that can be withdrawn tax & penalty free at the end of 2030.
HOWEVER, the Roth IRA ordering rules DO NOT apply to your Roth TSP.
Pro Rata TSP Distributions
Let’s say you did an in-plan conversion at some point in the past and now you want to distribute money from your Roth TSP.
The very first question we have to ask – is this a “qualified distribution”. Once again, this is a two-prong test and both prongs must be satisfied to get your money out of the Roth TSP completely free of tax and penalty.
Prong 1: 5-years have passed since January 1 of the calendar year in which you made your very first Roth TSP contribution, AND
Prong 2: You have reached age 59½, or have a permanent disability, or are the beneficiary of a deceased TSP owner’s account.
If you meet prong 1 and prong 2, you’re good to go. End of story. All distributions are tax and penalty free. No need to go down any rabbit holes concerning 5-year rules or anything else.
If you have NOT met prong 1 and prong 2 – you may owe tax and/or penalty.
What if you DID first fund your Roth TSP at least 5-years ago but you ARE NOT age 59.5, or disabled, or the beneficiary of a deceased TSP owner’s account?
--In that case, the EARNINGS are subject to BOTH ordinary income tax and a 10% penalty (unless another exception applies). Contributions were already taxed and aren’t subject to penalty.
What if you DID NOT first fund your Roth TSP at least 5-years ago but you ARE age 59.5, or disabled, or the beneficiary of a deceased TSP owner’s account?
--In that case, the EARNINGS are subject to ordinary income tax but there is no 10% penalty. Contributions were already taxed and aren’t subject to penalty.
Some of This, Some of That.
Unlike with a Roth IRA, you cannot distribute just your contributions from your Roth TSP. The Roth IRA ordering rules (explained in detail here) do not apply. Instead, (per Treasury regulations §1.402A-1) when you distribute money from your Roth TSP, you’re pulling out a proportionate amount of:
1. Contributions (“elective deferrals”)
2. In-plan converted amounts
3. Earnings
1. Contributions: Always tax and penalty-free (you already paid tax on them).
2. In-plan taxable converted amounts: Always tax-free when distributed (you already paid tax on them). However, don’t forget the 5-year rule that applies to the taxable converted amount. Violate this 5-year rule and you may owe a 10% penalty on the converted amount. This 5-year rule is different than the “5-year forever” rule we covered above that has to do with when you first funded your Roth TSP or first funded your Roth IRA.
Wasn’t it genius to create multiple 5-year rules regarding Roth money? Nobody loves you like the government.
3. Earnings: Follow the qualified distribution rules we talked about above. Depending on when you first funded your Roth TSP and whether or not you’re age 59.5, or disabled, or the beneficiary of a deceased TSP owner’s account – earnings could be subject to tax and penalty.
DISCLAIMER: There are MANY exceptions to the 10% early-withdrawal penalty. Even if you’re not over age 59.5, disabled, or the beneficiary of a deceased owner’s account – you may be able to avoid the 10% penalty.
Let’s do an example to break this down.
You have $100,000 total in your Roth TSP.
-$30,000 (30%) = Original Roth contributions (“elective deferrals”)
-$10,000 (10%) = In-plan conversion dollars
-$60,000 (60%) = Earnings
You withdraw $10,000 from your Roth TSP. They are actually sending you:
-$3,000 (30%) worth of original Roth contributions (elective deferrals)
-$1,000 (10%) worth of in-plan converted dollars
-$6,000 (60%) worth of earnings
Scenario 1
You DID first fund your Roth TSP at least 5-years ago and you ARE age 59.5, or disabled, or the beneficiary of a deceased Roth TSP owner’s account.
$10,000 = Tax & penalty free.
You’re good to go – this pro rata stuff doesn’t matter because the entire $10,000 distribution is “qualified”.
Scenario 2
You DID first fund your Roth TSP at least 5-years ago but you ARE NOT age 59.5, or disabled, or the beneficiary of a deceased TSP owner’s account.
-$3,000 = Tax & penalty free. Contributions were already taxed and are always penalty free.
-$1,000 = 10% penalty if it has NOT been 5-years since January 1 of the year you did the in-plan conversion. If it HAS been at least 5-years since January 1 of the year you did the in-plan conversion, this $1,000 is not subject to ordinary income tax or the 10% penalty. You paid tax already and satisfied the 5-year clock for this specific conversion (remember, first-in first-out).
-$6,000 = Subject to tax and a 10% penalty because it is a non-qualified distribution of earnings.
Scenario 3
You DID NOT first fund your Roth TSP at least 5-years ago but you ARE age 59.5, or disabled, or the beneficiary of a deceased TSP owner’s account.
-$3,000 = Tax & penalty free. Contributions were already taxed and are always penalty free.
-$1,000 = Tax & penalty free. You already paid the tax on the converted dollars and the 5-year rule for conversions does not apply after age 59.5. There is also a 10% exception specifically for disabled individuals and beneficiaries of a deceased TSP owner’s account.
-$6,000 = Subject to ordinary income tax but no 10% penalty. You did not satisfy both prongs so the earnings are not “qualified”.
Moving Roth TSP to a Roth IRA After In-Plan Conversions
What happens if you do a TSP in-plan Roth conversion and then rollover/transfer your Roth TSP to a Roth IRA.
Which 5-Year Rule Applies for the “first funded” prong?
The Roth IRA clock is what counts. Your Roth TSP time does not transfer to your Roth IRA.
From the IRS: “When you roll over a distribution from a designated Roth account to a Roth IRA, the period that the rolled-over funds were in the designated Roth account does not count toward the 5-taxable-year period for determining qualified distributions from the Roth IRA. However, if you had contributed to any Roth IRA in a prior year, the 5-taxable-year period for determining qualified distributions from a Roth IRA is measured from the earlier contribution. So, if the earlier contribution was made more than 5-years ago and you are over 59 ½ a distribution of amounts attributable to a rollover contribution from a designated Roth account would be a qualified distribution from the Roth IRA.” Source: IRS - Retirement Plans FAQs on Designated Roth Accounts
If You Transfer / Rollover a Roth TSP into a Roth IRA, Can You Withdraw Roth TSP Contributions Tax & Penalty Free Like You Can With a Roth IRA?
Yes – but there are two versions of this scenario.
Scenario 1: Transfer / Rollover from Roth TSP (NON-QUALIFIED) to Roth IRA
This would apply if you’re either younger than 59 ½ and/or you haven’t had your Roth TSP for at least 5 tax years. You have not satisfied the two-prong test to make your distributions qualified.
In this scenario, the characteristics of your dollars within the Roth TSP transfer to the Roth IRA. If your $70,000 Roth TSP consisted of $50,000 worth of Roth contributions and $20,000 worth of earnings growth, upon transferring this to your Roth IRA, you would have $50,000 basis/contributions (which can be withdrawn tax and penalty free) and $20,000 earnings added to your Roth IRA. Remember, the earnings portion would be subject to the two-prong test of “qualified” distributions.
IMPORTANT: If you execute a rollover/transfer from your Roth TSP to a Roth IRA or another Roth employer plan, make sure you save your TSP statements and grab screenshots of your balances as evidence to support how much of the rollover/transfer consists of contributions vs. earnings.
Scenario 2: Transfer / Rollover from Roth TSP (QUALIFIED) to Roth IRA
This would apply if you are 59 ½ and have had your Roth TSP for at least 5 tax years. In this scenario, all of your dollars (contributions, conversions, and earnings) are eligible for tax and penalty free withdrawal and would land in your Roth IRA as basis, meaning you could withdraw that amount tax and penalty free as if it were a regular Roth IRA contribution.
However, there could be a catch in this qualified TSP scenario if you have not satisfied 5-Year Rule # 1 / “5-Year Forever” rule, with any Roth IRA.
Let’s say you have $100,000 in your TSP. $40,000 worth of contributions and $60,000 from earnings.
(1) You are over 59 ½, and
(2) First funded your Roth TSP at least 5 tax years ago
Good news! You can take qualified distributions. You can take the entire $100,000, roll it into your Roth IRA, and it’ll be treated as basis. This $100,000 can be withdrawn completely tax and penalty free.
However, if this is the very first Roth IRA you’ve ever had in your life, any subsequent earnings that grow on top of that $100,000 are subject to the “5-Year Forever”/ “first funded” rule in order to come out tax-free. Remember, no 10% penalty would apply since you’re over age 59 ½, but earnings on top of that $100,000 would still be subject to the two-prong test of “qualified” distributions. You’d have to wait 5-years to distribute any growth on top of that $100,000 and have it come out tax free.
What About TSP In-Plan Converted Dollars that Move to a Roth IRA?
If any amount of the TSP in-plan conversion is distributed from the Roth TSP or a Roth IRA (after being transferred/rolled over) within 5-years of January 1 of the year of conversion – a 10% penalty will apply to that converted amount. Remember, the 5-year conversion clock attaches to those dollars and each conversion has its own 5-year clock. Ordinary income tax will not be owed since you already paid tax on that converted amount. However, the converted dollars have to “season” for 5-years before you get access to them penalty free – regardless of whether you left the dollars in your Roth TSP or rolled them into a Roth IRA or rolled them into a different employer’s Roth 401(k), 403(b), 457(b), etc.
“Section 408A(d)(3)(F) of the Code provides that any distribution from a Roth IRA that is allocable to the taxable amount of a rollover to the Roth IRA (other than from another Roth IRA or a designated Roth account) made within the preceding 5 taxable years is treated as includible in gross income for purposes of applying the 10% additional tax under § 72(t). The 5-year recapture rule also applies if the rollover to the Roth IRA is from a designated Roth account and the distribution is allocable to the taxable amount of an in-plan Roth rollover made within the preceding 5-years. (See Q&A-12 of this notice.).”
Beware the Crowd – Final Thoughts
Anwar Sadat...Julius Caesar...Archduke Franz Ferdinand...history has shown us time and time again that crowds, even those that appear friendly, can be very dangerous. Right now, in various social media groups, there’s a constant buzz surrounding TSP in-plan conversions. Many in the crowd have expressed excitement and joy at the thought of converting their pre-tax dollars to the magic realm of tax-free Roth.
However, beware the crowd.
Just because TSP is introducing in-plan Roth conversions does not mean that you need to convert or should feel pressure to get as much tax-free money as possible. This is not, “get it while it lasts” or something that you need to feel pressured by.
Don’t get me wrong - tax-free is amazing! I’m not shy about my love for Roth TSP, Roth IRA, and the quadruple-tax advantaged Health Savings Account (HSA). I frequently suggest the use of these accounts to new employees and mid-career folks in low/moderate marginal tax brackets. However, it’s a highly personal decision that needs to be evaluated based on your unique circumstances – not what people are saying on social media. There are still a lot of benefits to having traditional tax-deferred money. This isn’t an all-or-nothing, “rip off the band-aid” situation.
For some people, the Roth conversion question is very obvious. Their numbers are very small and there’s no need to convert, or their numbers are very large, and they most likely would benefit from converting some amount now.
For everyone else, it’s more nuanced.
What’s better than spending your hard-earned money on taxes to pay for Roth conversions?
Spending money now on experiences and enjoyment with family and friends.
Spending money now to do that thing you’ve been putting off.
Spending money now to chase a passion.
Spending money now to invest in yourself and start a business.
The good news – if you’re reading this, Roth conversions aren’t going to significantly change your life. I have no doubt that you’re going to be fine either way. People who live in the personal finance world, reading blogs, listening to podcasts, exploring topics with strangers on social media are usually the saver/planner types. You’ve most likely contributed to retirement accounts, non-retirement accounts, avoided “get rich quick” schemes, stayed out of consumer debt, and have more spreadsheets than you’ll admit to your friends.
Convert or don’t convert – it’s not a Roth conversion that truly moves the needle towards financial freedom. Remember what truly matters when it comes to wealth building.
Awareness – Knowing your numbers (debt, interest rates, expenses, etc.)
Having an adequate emergency fund.
Paying off debt.
Cash flow – Spending less than you make.
Keeping fees low (and knowing exactly what fees you’re paying).
Proper asset allocation based on your risk tolerance, risk capacity, and time horizon.
Keeping your behavior in check – Overconfidence, herd mentality, recency bias, FOMO, fear & greed, market timing, etc.).
Obtaining the appropriate insurance for events that are low probability high severity (term life, homeowners, auto, umbrella, professional liability, etc.)
Estate planning – Make sure your beneficiary forms are up-to-date with primary and contingent beneficiaries, have a Last Will, Power of Attorney, Healthcare Proxy, and an Advanced Directive/Living Will.
As the money nerd in your family and circle of friends at work, be the voice of reason and slow people down once the in-plan conversion excitement starts. Talk about the pros and cons, tax dominoes, the other conversion factors discussed in this document, and don’t forget the basics listed above. I believe that the majority of people would benefit from paying down debt, building an emergency fund, and fixing their monthly cash flow versus doing Roth conversions.
Knowledge truly is power. Please share this with anyone who you think would benefit.
About the Author
Tyler Weerden is a fee-only financial planner and the owner of Layered Financial, a Registered Investment Advisory firm based in Arlington, Virginia. In addition to being a financial planner, Tyler is a full-time federal agent. He holds a Bachelor of Science degree, a Master of Science degree, passed the Series 65 exam, and is a Certified Fraud Examiner (CFE). Tyler is the sole Investment Adviser Representative at Layered Financial.
Prior to becoming a federal agent, Tyler served as a state trooper, local police officer, and was a member of the U.S. Army National Guard. He has served in both domestic and overseas Foreign Service assignments. Tyler has experience with local, state, and federal pension systems, 457(b) Deferred Compensation, the federal Thrift Savings Plan (TSP), Individual Retirement Accounts (IRAs), Health Savings Accounts (HSAs), and various investment options to include rental real estate.
Disclaimer
Layered Financial is a Registered Investment Adviser registered with the Commonwealth of Virginia and State of Texas. Registration does not imply a certain level of skill or training. The views and opinions expressed are as of the date of publication and are subject to change. The content of this publication is for informational or educational purposes only. This content is not intended as individualized investment advice, or as tax, accounting, or legal advice. Nothing in this article should be seen as a recommendation or advertisement. Layered Financial and its Investment Advisor Representatives have no third-party affiliations and do not receive any commissions, fees, direct compensation, indirect compensation, or any benefit from any outside individuals or companies. Although we gather information from sources that we deem to be reliable, we cannot guarantee the accuracy, timeliness, or completeness of any information prepared by any unaffiliated third-party. When specific investments, types of investments, products, or companies are mentioned, such mention is not intended to be a recommendation or endorsement to buy or sell the specific investment, solicit the business, or use that product. The author of this publication may hold positions in investments or types of investments mentioned in articles. This information should not be relied upon as the sole factor in an investment-making decision. Readers are encouraged to consult with professional financial, accounting, tax, or legal advisers to address their specific needs and circumstances.
© 2025 Tyler Weerden. All rights reserved. This article may not be reproduced without express written consent from Tyler Weerden.