The Thrift Savings Plan (TSP) has released additional details about its upcoming Roth in-plan conversion feature, scheduled to launch on January 28. This new option will allow participants to convert traditional (pre-tax) TSP balances into Roth balances, creating a potential opportunity to better manage taxes in retirement.
Traditional vs. Roth TSP: What’s the Difference?
Traditional TSP contributions are made with pre-tax dollars, reducing taxable income today, but withdrawals, including earnings, are taxed in retirement. Roth TSP contributions, on the other hand, are made with after-tax dollars, allowing qualified withdrawals of both contributions and earnings to be tax-free. Another key distinction is that Roth TSP balances are not subject to required minimum distributions (RMDs) at age 73, unlike traditional balances. It’s also important to note that for FERS employees, agency matching contributions will continue to be deposited into the traditional TSP, even if you contribute to or convert to Roth.
How a TSP Roth Conversion Works
A Roth conversion involves transferring pre-tax funds from your traditional TSP balance into a Roth balance. If you don’t already have a Roth TSP, your first conversion will automatically create one. The amount you convert is treated as taxable income in the year of the conversion, meaning you’ll owe income taxes based on your current tax rate. Taxes must be paid using funds from outside your TSP, such as savings or other non-retirement assets, as the TSP does not allow taxes to be withheld from the converted amount. Because this creates a taxable event, careful planning is essential.
The TSP strongly encourages participants considering a Roth conversion to consult a tax professional to understand how the conversion could impact taxable income and estimate the resulting tax liability. To help with this process, the TSP is also developing a calculator designed to project the tax implications of a conversion.
Additional Details to Know
The Roth conversion feature will be available to active employees, separated participants, and spousal beneficiaries, with a minimum conversion amount of $500. The TSP will report the taxable conversion amount to the IRS for the year in which it occurs, but will not withhold taxes on your behalf. As of late summer, roughly 2.82 million of the 7.25 million TSP participants held Roth balances, totaling approximately $81 billion.
A Roth conversion can be a powerful planning tool, but it isn’t the right move for everyone. To determine whether an in-plan Roth conversion aligns with your retirement and tax strategy, consider speaking with a Federal Retirement Consultant (FRC®) who can provide a comprehensive benefits analysis and help identify the approach that best fits your goals.
