Starting January 1, 2026, federal employees will gain access to a powerful new retirement planning tool: the ability to convert traditional (pre-tax) Thrift Savings Plan (TSP) funds into Roth TSP balances within the same account. This in-plan Roth conversion feature introduces a more streamlined, flexible way to manage your retirement tax burden without leaving the TSP ecosystem.

Whether you’re mid-career, near retirement, or just starting out, understanding how this update works and whether it makes sense for you is essential for long-term financial confidence.

An in‑plan Roth conversion allows you to transfer money from the traditional (pre-tax) portion of your TSP into the Roth (after-tax) portion without needing to roll it into an external Roth IRA.

Here’s how it works:

• Converted amounts are treated as taxable income in the year the conversion takes place.
• Taxes must be paid out-of-pocket, as TSP funds cannot be used to cover the tax liability.
• After conversion, the money grows tax-free, and if withdrawal conditions are met, distributions in retirement are also entirely tax-free.

This conversion gives you more control over your retirement tax exposure, but it also introduces short-term tax consequences that must be carefully planned for.

Until now, federal employees looking to shift pre-tax TSP savings into Roth status had to go through complicated rollovers into Roth IRAs. That process involved opening new accounts, moving assets, and dealing with custodial paperwork.

The 2026 update simplifies everything:

• No account transfers or paperwork hassles
• Keeps everything inside your TSP, preserving its low fees and federal-level oversight
• Improves tax-planning strategies directly within the TSP system

It’s a milestone that puts the TSP more in line with 401(k) features seen in the private sector and gives you the opportunity to rethink your tax strategy long before retirement.

This option isn’t for everyone, but for some federal employees, it could be a game-changer. Consider whether the following apply to you:

• You’re early or mid-career and expect higher income (and higher tax rates) in retirement.
• You have sufficient non-TSP funds set aside to cover the tax liability from the conversion.
• You want to build a tax-diversified retirement strategy, balancing pre-tax and after-tax assets.
• You’re in a low-income year (such as transitioning jobs or separating from military service).
• You anticipate long-term growth in your TSP investments and want those earnings to be tax-free.

If any of these situations apply, a Roth conversion could add significant value to your long-term retirement outlook.

Even though the in-plan Roth conversion offers flexibility, it also comes with risks if not managed properly. Important factors to keep in mind:

1. Taxes Apply to the Amount You Convert

When you move traditional TSP funds into the Roth TSP, the amount you convert is treated as ordinary taxable income for that year. For instance, if you convert $50,000 in 2026, that amount is added to your total income for the year.

This could:

• Increase your taxable income enough to enter a higher tax bracket
• Limit your access to tax credits or deductions you might otherwise qualify for
• Trigger higher Medicare premiums in retirement due to a higher Modified Adjusted Gross Income (MAGI)

2. Taxes Must Be Paid Non-TSP Funds

Taxes on a Roth converfrom sion must be paid from outside your TSP account. The IRS requires you to cover the taxes using personal funds held outside of the TSP. Without that liquidity, the conversion could create financial strain rather than long-term benefit.

3. The Decision Is Permanent

Unlike in the past, Roth conversions can no longer be reversed. Once you convert funds from traditional to Roth, the transaction is final. There’s no option to recharacterize or undo it, so it’s critical to run the numbers and assess the impact carefully before proceeding.

4. Roth TSP ≠ Roth IRA

Though both accounts share the same core benefit, tax-free growth and qualified withdrawals, they’re not identical:

• Roth TSPs are subject to Required Minimum Distributions (RMDs), whereas Roth IRAs are not.
• Withdrawal rules differ between the two, particularly around how contributions and earnings are accessed.
• Roth IRAs may offer more flexibility in early or penalty-free withdrawals under certain circumstances.

That said, Roth TSPs still offer a strong long-term tax advantage, especially for those seeking a more tax-diversified retirement portfolio.

The new in-plan Roth conversion feature opens doors, but strategy is everything. Here’s how to approach it wisely:

1. Forecast Your Future Tax Bracket

Ask yourself: Will my tax rate in 2026 likely be lower than it will be in retirement? If the answer is yes, converting during this window could result in significant long-term savings.

2. Choose the Right Conversion Amount

A full conversion isn’t always necessary or wise. Consider partial conversions over several years to keep your taxable income within a manageable range.

Example: Convert $15,000–$25,000 annually between ages 60 and 64 to stay below the 22% federal tax bracket.

3. Build a Tax Reserve Now

Since taxes on the converted amount must be paid separately, it’s essential to start building a reserve fund now. Whether in a high-yield savings account or a short-term investment vehicle, having this money ready will help you convert confidently and avoid financial pressure.

4. Consider Retirement Timing and TSP Withdrawals

If you’re retiring soon and will no longer earn income, you may have a low-income window that’s ideal for Roth conversions before RMDs begin at age 73.

5. Review With a Tax Advisor or Retirement Planner

Roth conversions involve complex tax implications. Even if you’re confident in your plan, get a second opinion from an expert federal retirement financial advisor who understands both federal retirement benefits and tax planning.

The in‑plan Roth conversion launching in 2026 gives you unprecedented flexibility within the TSP, but it also comes with new responsibilities. Timing, tax brackets, outside cash flow, and long-term goals all play a role in whether this move fits your retirement vision.

While many federal employees will benefit from having Roth funds to draw from later in life, especially when required distributions or Social Security benefits come into play, it’s not a one-size-fits-all decision. If done poorly, the conversion could lead to avoidable tax burdens. Strategic planning can minimize long-term taxes and maximize your take-home income during retirement.

Start preparing now. Track your income trajectory, map out your ideal retirement timeline, and talk to a tax-savvy retirement specialist to explore your best path forward. With the right plan in place, this 2026 TSP feature could be one of the most valuable upgrades to your retirement strategy yet.