Should You Convert Your TSP to Roth in 2026?

For those who, relative to financial news, blessedly live under a rock, it’s time to, well… rejoice, is a strong word, but it might be time to crawl out and check your TSP statement. The TSP has officially announced that in-plan Roth Conversions will be available in January 2026. Financial warrior nerds have been clamoring for this like Star Wars fans waiting for the next swish of a lightsaber. Should you join their fervor?

Roth vs. Traditional 101

When you invest in the TSP (outside a combat zone), you either get a tax break this year (Traditional) or a tax break when you take money out in retirement (Roth).  While finfluencers and armchair advisors often bleat that Roth is always superior for military families, and it often is, always is not always true.

Let’s math for a moment. Invest $10K into your TSP this year in the 22% bracket and earn an average of 7% over the next 30 years. You’ll have about $76K to spend in retirement. Sort of. If you invest in the Roth TSP, you pay your tax bill on the $10K ($2.2K) in the year you earn it, so you actually do get to spend the whole $76K.

If, however, you invested in the Traditional TSP, you don’t get to spend all $76K. You must split it with your partner, Aunt IRS. Her share depends on your federal and state tax brackets when you take the money out in retirement. If there is still a 22% bracket and you’re in it in retirement, then you have about $59K to spend.

What if you’re in the 24% bracket today and expect to be in the 22% bracket in retirement? If you invest in Roth TSP, you pay $2,400 in taxes when you could have paid $2,200, but with Traditional TSP, you skip paying $2,400 to pay $2,200 instead.

Thus, generally, you want to invest in Traditional TSP if you expect to be in a lower tax bracket in retirement and Roth TSP if the opposite.

Is Roth vs. Traditional Really That Simple?

If only… When considering Roth vs. Traditional TSP, you need to get out an abacus and a crystal ball to make the right decision. Don’t have either? 2 Same. But here are some considerations to help make an educated guess.

1. Military members without a high-earning spouse often are in their lowest earning and lowest tax-rate years. This argues for Roth and time/tax arbitrage.

2. Military retirees often have a higher income floor than gen pop in retirement because the combination of military pension, Social Security, and Required Minimum Distribution (RMDs) creates a high taxable floor. This argues for Roth as “tax insurance.”

3. Military members often signature-manage state taxation but will pay state income taxes in retirement (unless the siren song of golf cart parades and pineapples on doors in the Villages calls to you). This argues for Roth as state income tax arbitrage.

4. Future tax rates should be higher because the geezer class continues to snort lines of debt, leaving an unholy interest bill for their kids and grandkids to pay. This argues for Roth as tax insurance.

Traditional TSP has its place sometimes, too.

1. Due to wonky rules for taxation in a combat zone, switching to Traditional TSP while contributing in a combat zone is necessary to optimize TSP use while deployed. It’s complicated.

2. With a high-earning spouse but no anticipation of a military pension, Traditional could make sense.

3. With a spouse who’s significantly older and will retire sooner, Traditional TSP could make sense.

4. In the year of an upfront bonus for a single member, Traditional could make sense.

Finally, while there is some trickery to this example, if tax rates are the same in retirement, Roth vs. Traditional is a wash.

If you have $10K to invest, with Roth, you really only put $7.8K into the TSP after taxes, so:

$7.8K at 7% over 30 years is about $59K, which is the same as $10K invested over the same period but taxed on the backside at 22%.

The trickery here is that about 0% of people will only invest $7.8K because of the taxation. They will forgo other spending goals to the tune of the $2.2K tax bill so they can achieve their $10K investing goal.

I generally scoff at the “it’s a wash” argument both because of this tendency and the unknowability of future tax rates.

Roth Conversion 101

Roth Conversions are the hottest topic this side of Ben Gay smell to retirees, at least for the saver class.  When sexagenarians look at the taxes they’ll pay on Required Minimum Distributions (RMDs) from their next egg (TSP, IRAs, 401(k), taxable accounts), they keep cardiologists in business.  The bill is often a staggering 7-figure number from age 65 to life expectancy.

But, doing some of that tax-bracket arbitrage, which is an even fancier name for a Roth Conversion, can lay down some serious suppressing fires on that tax bill. Put more simply, a Roth Conversion is paying an intentionally higher tax bill today to pay a lower tax bill over the rest of your life.

If you’re in the 22% bracket today, but expect to be in the 24% + 5% of state taxes in retirement, paying 22% to move some dollars from the Traditional pile to the Roth Pile should be a no-brainer.

NOTE: It’s rarely a no-brainer because the dollars you use to perform a Roth Conversion could have made memories, bought food, paid for college, or countless other near-term goals.

Yet, the earlier you Roth Convert Traditional dollars, the more time they compound and the larger the tax-free balance is in retirement. That’s an appealing gamble to the math-inclined.

Other reasons to consider a Roth Conversion include:

1. There are no Required Minimum Distributions (RMDs) on Roth TSP or Roth IRAs.

2. States generally don’t tax Roth distributions, but usually do tax Roth Conversions, so doing Roth Conversions before moving to a state with income tax can suppress the lifetime tax bill.

3. The “2, 1, 0” considerations:
   1. Will Roth Conversions lower the lifetime tax bill of “2” spouses, married filing jointly, over their similar life expectancies?
   2. Will Roth Conversions lower the lifetime tax bill of “1” surviving spouse or single person, spending lots of years in the punishing single person tax brackets?
   3. Will Roth Conversions be better for “0” of us as we pass on tax-free Roth dollars to our heirs by pre-paying the tax bill?

Finally, Roth Conversion is not a one-and-done activity. Usually, you’ll want to Roth Convert a slice of your Traditional balance each year to fill up a certain tax bracket (12%, 22%, etc.) or to use up your budget for extra tax dollars.  Sometimes, the dollars for paying tax on a Roth Conversion come from an anticipated tax refund.  I.e., you pay tax with dollars you really don’t have in your pocket yet, so it doesn’t hurt much.

Okay, now that your brain hurts enough, let’s look at this whole “Roth Conversions inside the TSP” issue.

Roth Conversions Inside the TSP, a.k.a “In-Plan”

Until 2026, when this change takes effect, TSP participants had to wait until age 59.5 or leave the military or civil service to withdraw money from the TSP for a Roth Conversion. For officers who often go from the 22% tax bracket to 24%, 32% or higher (plus state taxation) after military retirement, but before “real” retirement, the “window” for cheap Roth Conversions doesn’t really manifest until their sixties.

If a TSP participant has a Traditional (pre-tax) balance, from either matching funds, combat zone contributions, intentionally or unintentionally contributing to the Traditional TSP, or just contributing to the Traditional TSP before Roth TSP was a thing (my fellow geezers and I…), it would be nice to have the option to pay a lower rate like 22% than having to pay 24% or higher down the road.

Remember, many, if not most, military members are paying their lowest lifetime tax rates while serving.

Now that the TSP will allow in-plan Roth Conversions, current servicemembers and civil servants can start using up their low tax bracket without having to wait until retirement/separation. This can drastically lower a lifetime tax bill.

What’s the Catch?

If you believe in things that aren’t true, say, free lunches or things politicians say, you can stop reading here. Still with me? Great. Other than the two core realities of Roth Conversions:

1. You willingly pay more tax today than you have to, because…
2. You believe you’ll be in a higher tax bracket when you use the money in retirement (or the 2-1-0 considerations)

Knowns, Unknown and Otherwise

To get a bit Rumsfeldian here, a reason to pump your excitement brakes about in-plan Roth Conversions is that the TSP has released scant details about the execution. If TSP rolls out something akin to the Mutual Fund window, we can all probably yawn or stretch our middle finger because the juice vs. squeeze ratio could be laughable.

Let’s start with known issues about in-plan Roth Conversions in general:

1. There will be a tax bill. Using 2025 tax bracket numbers, if a married couple has taxable income of $196,600, which is $10,100 below the threshold of the 24% bracket, they could convert $10,100* and still only pay $2,200 in extra tax.

2. The tax can’t be paid from the converted amount. It might seem nice to pay the $2,200 tax bill out of the $10K conversion, but even if TSP allowed this, it would cost an extra $220 because the IRS would view it as an unqualified withdrawal and charge a10% penalty on the tax. You must pay the tax from Federal Income Tax Withholding (FITW) or estimated tax payments. This implies increasing your withholding or making a timely estimated payment.

3. Watch your head. Using our same example couple, they should not convert $10,100 unless they want to risk paying 24% on some of the converted dollars; they should leave some margin between their taxable income with the conversion and the top of the bracket. Until the tax forms flow the following year, you just can’t get terribly precise. Leave headroom between the taxable income number with the conversion and the top of the tax bracket to avoid an expensive surprise.

4. Pay the tax when you do the conversion. A Roth Conversion looks the same as an income spike from selling stocks or a home, and there’s no withholding on it. Yet, Aunt IRS expects payment at least in the fiscal quarter of the Roth Conversion. You can end up with a late/underpayment penalty if you don’t increase your withholding or send in an estimated tax payment.

5. Tax forms are important. You’ll receive a 1099-R tax form in February after a Roth Conversion. The data should be carefully reviewed and input into tax software. Be sure to tell your tax professional in plain English what you did so you don’t pay tax twice or get a love note from Aunt IRS.

6. Along Comes MAGI. Modified Adjusted Gross Income is a hydra of a concept since there are more definitions of MAGI than you have fingers, and new ones sprout each year. But the various MAGI definitions create tax thresholds for the loss of deductions, credits, and other opportunities, such as:
   1. The child tax credit, which phases out starting at $400K
   2. The car loan interest deduction, phasing out at $200K
   3. The Roth IRA contribution limit, phasing out at $236K

Some MAGI definitions change each year, and others are static, creating stealth tax increases. What’s more, the amount of a Roth Conversion is included in some MAGI numbers but not others. E.g., it does affect the Child Tax Credit but doesn’t affect the Roth IRA contribution limit. You must calculate not just your tax bracket limits, but the MAGI booby traps that could impose more taxes, too.

7. Medicare Shadow Tax. While most servicemembers considering in-plan Roth Conversions are a long way from age 63, older TSP participants who want to perform in-plan Roth Conversions need to watch out for the Medicare shadow tax known as IRMAA, or Income-Related Monthly Adjustment Amount.

8. Timing matters. Most Roth Conversions happen near the end of the tax year because that’s when you have the most clarity on taxable income and the MAGIs. This helps avoid tripping into a higher tax bill by converting too much.

However, if the market takes a big dip, a Roth Conversion punches above its weight. Imagine that you have a $100K Traditional TSP balance, but a buffoonerous policy rolls out of a politician’s mouth, and the market sets the flight path marker 30 degrees below the horizon. You now have $70K. The tax bill on a $70K Roth Conversion is much lower than the bill on $100K, but the balance in your Roth account will be bigger when the market recovers.

This often leads to a strategy of having an approximate “budget” for Roth Conversions at the beginning of the year, so it’s reasonable to perform a Roth Conversion at a market dip.

Another advantage of a “budget” for the year is that the sooner your pre-tax dollars become Roth dollars, the more time they have for growth as Roth dollars, which can lower your lifetime tax bill. Time in the market vs. timing the market…

Now for the known unknowns:

1. Perhaps the biggest known unknown is how combat zone tax-exempt (CZTE) dollars will be handled. As a refresher, you never paid tax when you earned those dollars, and you shouldn’t when you either spend them in retirement or move them to a Roth IRA after you retire or separate. However, the growth on those dollars is pre-tax, which is why most of us want to get those dollars into a Roth IRA after retirement or separation so that the growth becomes “Roth” or tax-free.

The TSP hasn’t said whether we’ll be able to use in-plan Roth Conversion to make those CTZE contributions into Roth dollars. Hopefully, the answer is yes, because the default is a tax hike on service members who stay in.

2. Speed. The TSP isn’t known for its pace or agility. Will Roth Conversions process the next day or in two weeks? If you’re trying to capitalize on a market dip, that matters.

3. Size. While it’s unlikely that there will be a maximum Roth Conversion limit (other than your Traditional balance), there’s a rumor that $500 will be the minimum. That’s reasonable, but if the limit is higher, it could constrain your ability to hyper-optimize by “filling up tax brackets” each year.

There may also be unknown unknowns, but as Don Rumsfeld said, those are the tough ones to deal with.

Cleared to Rejoin

Congrats on sticking with it. This wasn’t supposed to be a tome, but in-plan Roth Conversions don’t make much sense if we don’t explore Roth Conversions in the first place. Keep an eye out in January 2026 for how the TSP rolls this program out, but in the meantime, if you don’t already work with a financial planner who can help you perform accurate tax projections multiple times throughout the year, and especially towards the end of the year, it might be time to start. You’ll need to measure quite a bit before cutting, but if you do, you might save thousands or more on your tax bill.  Finally, here’s a quick checklist to brush off each year:

1. Perform the most accurate tax projection you can.
2. Start the year with a potential Roth Conversion “Budget.”
3. Check all of the MAGI and other thresholds relevant to your situation.
4. Confirm where you will source the extra dollars for the additional tax bill.
5. Consider a “market decline” trigger for early-in-the-year Roth Conversions.
6. Execute the conversion on your timing.
7. Pay the tax on time to avoid a penalty.
8. Lather, rinse, repeat.

Fight’s On!

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