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Hello everyone. I'm Ian Smith here with
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fedsmith.com. Here to talk to you today
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about Roth Inplan conversions. They're
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coming soon to the Thrift Savings Plan.
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The TSP announced that they will be
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available starting January 28th, 2026.
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And this is exciting news. A lot of our
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readers on the fedsmith.com website have
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commented that this is a feature they've
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wanted for many years. So, what are Roth
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inplan conversions and how do they work
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and why should you care about this? How
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might it benefit your retirement
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savings? Let's take a look. So, what is
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a Roth inplan conversion? It allows you
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to move or convert money from your
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traditional or pre-tax TSP account to
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your Roth or after tax TSP account. So,
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why would you want to do this? Well, it
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offers long-term tax benefits.
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Say that you're a 30-year-old federal
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employee saving in your TSP and you move
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money from traditional over to Roth.
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That's a taxable event. You'll pay the
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taxes on it now, but that money is going
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to sit there and grow because it's
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invested in the TSP funds for maybe 30
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to 40 years. If you're 30 years old, you
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retire in your 60s, even 70s. That's a
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long time. And all of that money will
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grow tax-free now that it's been moved
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over to the Roth account. And once you
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reach retirement, qualified withdrawals
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are tax-free in retirement. So you pay
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the taxes upfront, pay them now on the
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conversion, the money grows over time,
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and then it's not taxed again on on the
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qualified withdrawals. And so that's
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potential savings of even hundreds of
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thousands of dollars in taxes
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potentially depending on how much you
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invest and how it's invested and
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whatnot. But again, it's a taxable
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event. It's a complex process. So you do
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want to understand how all of this
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works. That's something I'm going to
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repeat a few times in this video. I want
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to make very sure. Plan carefully. This
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isn't something you're going to want to
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just click a button and go off and do.
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You'll want to consult with financial
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advisors, tax advisors, etc. for your
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situation to see would this be
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beneficial for you. How will these work?
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All TSP participants are eligible. The
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only exception is non-spouse
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beneficiaries. According to the TSP,
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you can request a maximum of 26 Roth
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conversions per account per year.
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Participants will be able to request a
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specific dollar amount for the Roth
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conversion. That's the default choice.
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for a percentage of their eligible funds
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to convert. The minimum conversion
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amount is $500. And also, you must leave
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at least $500 in each nonroth payroll
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account source. So, traditional
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taxexempt automatic 1% and agency match
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accounts to support potential future
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Also, when you choose your conversion
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amount, the money will be taken
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proportionally from your eligible
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contribution sources. So, your own
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traditional payroll contributions,
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agency or service matching contributions
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if applicable, agency or service
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automatic 1% contributions if
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traditional rollover contributions
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you've made. The TSP mutual fund window
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investments are not eligible for Roth
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and plan conversions. And these
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conversions are also irrevocable. So
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once you submit them, there's no going
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back. It can't be undone. And that's
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something to be aware of also in your
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Important tax considerations.
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Remember this is a taxable event. So
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when you do these conversions, it raises
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your total taxable income for the year
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and you have to pay taxes on it. Now,
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even though the money will grow tax-free
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over time, with that in mind, the TSP
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recommends asking these four questions
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when considering whether or not to do
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Roth in plan conversions.
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Number one, how much or how, excuse me,
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how will it affect my taxable income for
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the year? Number two, how much income
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tax will I need to pay on the amount of
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money I convert? Number three, will this
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conversion raise my federal marginal tax
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rate? And number four, do I have enough
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money to pay the income tax on the
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conversion? That's very important.
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Converting the pre-tax money from your
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traditional TSP balance to a Roth in
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plan conversion increases your taxable
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income for the year. So you'll pay
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income tax on the conversion of your
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applicable rate. Because it's increasing
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your taxable income for the year, you're
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you may end up in a higher tax bracket
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by doing the conversion. Say your annual
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total income for the year is $100,000.
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You convert say $50,000
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in this one of these Roth conversions.
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Now your total taxable income is
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You could end up in a higher tax
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bracket, meaning you'll pay more taxes
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on the the higher amounts. That's called
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bracket bumping. And again, that's why
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it's very important to consult with the
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tax advisor. Make sure you understand
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all of this. Um, also when you pay the
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tax, the income tax on the conversion,
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uh, it must be from another source
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according to the TSP such as a savings
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account. You cannot use a portion of the
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money you're converting to pay the
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taxes. That's also very important. The
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TSP is not going to withhold that money
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back for taxes. And because there is no
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withholding done at the time of the
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conversion, you may have to make
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estimated payments to the IRS
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on the uh, amount of money you're
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converting. If you don't make the
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estimated payments, then you can get
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penalties on top of what you already owe
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in taxes. So, say you do a Roth
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conversion in the summer and you don't
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pay any taxes, any make any estimated
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payments to the IRS at that time. Well,
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when tax time rolls around next spring
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in addition to the taxes you owe, the
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IRS may hit you with a penalty. and that
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those can be pretty steep, especially
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depending on the amount of money you're
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talking about. And so that can just pile
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onto the taxes you owe. So again,
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something else to to keep in mind in all
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of this. Once again, it's very important
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to uh plan all this carefully, working
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with your financial advisor and tax
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uh to make sure that you understand any
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tax ramifications and also if this would
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be beneficial for your situation.
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Five-year rules. There are two five-year
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rules that apply to Roth conversions and
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I'll just cover them quickly here based
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on what the TSP has said about them. The
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first rule, Roth earnings are not taxed
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if the distribution is considered
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qualified. For Roth earnings to be
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qualified and therefore tax-free, they
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must meet both of these IRS
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requirements. Number one, five years
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have passed since January 1st of the
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calendar year in which you made your
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first Roth contribution or your first
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Roth inplan conversion if your first
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conversion creates your Roth TSP
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balance. And uh number two, you have
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reached age 59 and a half, have a
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permanent disability or are deceased.
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And then the second rule,
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each Roth inplan conversion initiates a
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five-year clock that commences on
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January 1st of the year of each Roth
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conversion. If you withdraw money that
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includes converted funds within 5 years
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of conversion, you must pay a 10% early
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withdrawal penalty tax to the IRS unless
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an exception applies, such as being age
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59 and a half or older.
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I've written an article on fedsmith.com
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that covers these five-year rules that
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the TSP notes in a little bit more
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detail as well as all of this. I know
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this is a complex topic and my intent in
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making this video is not to put you off
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to the notion of doing Roth in plan
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conversions in the TSP. It can be an
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excellent way to reduce taxes and boost
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your long-term savings for retirement,
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but it does require careful planning.
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And that's why I mentioned you need to
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consult with at a minimum tax advisors
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and financial planners for your for your
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situation to make sure you understand
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it, to understand how it would apply to
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your situation, if it makes sense, and
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also to develop a strategy for paying
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the taxes. But it is uh exciting news. I
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know a lot of people have wanted this
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feature in the TSP for a long time. It
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will be here soon. And let me know in
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the comments if you plan to use the Roth
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in plan conversions feature once it
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arrives in the TSP. I'd be curious to
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know what your opinion of it is. Thank
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you for watching. Have a good day.
