Roth Conversion for Your TSP Account: 5 Tax Planning Considerations

Starting in January 2026, the Thrift Savings Plan (TSP) is rolling out a major change in tax policy: in-plan Roth conversions.

If you’ve been sitting on a traditional TSP balance, wondering whether you should convert to a Roth, this new option opens doors that weren’t previously available.

But here’s the thing, just because you can convert doesn’t mean you should. A Roth conversion forces you to pay taxes now in exchange for tax-free withdrawals later. When thinking about whether this idea is for you, you should consider the following situations:

• Your current tax bracket
• Your projected retirement income
• Whether you have combat zone contributions sitting in your account.

This guide walks through five key tax considerations every servicemember and federal employee should evaluate before making a conversion decision.

Roth Conversion Point #1: You Can Do Roth Conversions Within the Thrift Savings Plan (TSP)

Under previous rules, Roth conversions were not possible within the Thrift Savings Plan. However, beginning in January 2026, the TSP will allow ‘in-plan conversions.’ 

If you don’t have a Roth TSP balance in your TSP account, your first Roth in-plan conversion will create one. The first questions you should ask yourself when you consider doing a Roth in-plan conversion are about the immediate effects on taxes you would owe:

• How will it affect my taxable income for the year?
• How much income tax will I need to pay on the amount of money I convert?
• Will this conversion raise my federal marginal tax rate?
• Do I have enough money to pay the income tax on the conversion?

Be careful. Once completed, Roth conversions cannot be reversed.

You can find numerous low-cost providers online. However, you should evaluate the increased costs of managing within an IRA versus TSP.

Roth Conversion Point #2: Combat Zone Contributions

Many people have tax-free contributions from combat zone earnings. If tax-free contributions are a significant part of the TSP account, there are four major considerations:

1. IRA custodians only track pre-tax (traditional IRA) and post-tax (Roth IRA) accounts. When it comes to the tax treatment of your distributions, do not expect your IRA custodian to get it right. You’ll likely need to keep meticulous records or hire a tax professional or financial planner for assistance. Or, you can follow this guide to maintain the tax-exempt status of contributions when you do an IRA rollover. This is an advanced tax strategy, and it’s worth enlisting assistance to ensure you do it correctly.

2. There is no true tax benefit to converting tax-free contributions to a Roth account. The primary tax benefit of a Roth account is to avoid paying taxes on distributions. Since the IRS does not tax combat zone contributions upon distribution, there is no additional benefit in this regard. There are, however, other Roth benefits, such as RMD avoidance and the ability to make unlimited withdrawals of contributions/conversions under qualifying circumstances. That said, if you convert tax-exempt contributions to a Roth IRA, all earnings on those contributions become tax-free.

3. You can’t choose between TSP distributions of pre-tax, post-tax, or tax-free contributions. According to IRS Notice 2014-54, “any distributions from retirement accounts must be proportionally drawn from pre-tax and post-tax accounts.” IRS Notice 2014-54 doesn’t specifically discuss tax-free accounts. However, the TSP website clearly states that withdrawals will contain proportional amounts of Roth, traditional, and tax-exempt contributions.

4. While combat zone contributions are tax-free, earnings on these contributions are fully taxable. This is a true statement if the tax-exempt contributions remain in a Traditional account. If you convert them to a Roth account, the earnings after the conversion will also become tax-free.

Roth Conversion Point #3: Tax Planning

This is probably one of the most important yet overlooked considerations. The entire purpose of tax planning is to minimize tax liability. To do this properly, you must consider it from a long-term perspective. Usually, this is done through a balance of:

• Deferring the recognition of income
• Taking advantage of tax incentives, such as deductions or credits, or
• Shifting the recognition of income to take advantage of the lowest possible tax bracket

Roth conversions actually force the recognition of income earlier than needed. This directly violates the first principle. Since that’s true, there needs to be a really compelling set of circumstances that follow one of the other principles.

However, there are many cases in which people simply want to take advantage of the tax-free distribution benefit of a Roth. In doing so, they may overlook the fact that they will pay:

• More money than they need to
• Sooner than they need to do it

A tax-efficient approach enables people to adopt a multi-year strategy. This ensures that Roth conversions are usually done at the lowest possible tax bracket. The expectation is that distributions occur when the earner is in a higher tax bracket.

Roth Conversion Point #4: Tax Bracket Projection

To continue the previous point, Roth conversions work best when you know that your future tax bracket will be higher than the current one. Many people get this wrong. They make Roth conversions during high-earning years (high tax bracket), so they can have tax-free distributions during their retirement years (low tax bracket).

It’s worse when you observe that many of these balances contain contributions from lower tax years. In these cases, these folks are paying more than if they had directly contributed to the Roth account. And, they’re paying taxes sooner than if they had decided to take distributions (or make a conversion) later on. That’s the worst of both worlds.

Fortunately, most servicemembers have a better opportunity. Usually (although not definitely), military families are in lower tax brackets (compared to their peers) over the course of their careers. Then, when they retire, many folks see an unexpected jump in income (and tax bracket). Doing a Roth conversion after you’ve already seen a significant post-military jump in tax bracket can lead to paying more in taxes than you should.

Instead, it might be worthwhile to do your conversion during a low-income year, such as a deployment year. In most cases, it’s definitely worth evaluating the possibility of doing your Roth conversion over multiple years, while you’re on active duty.

Roth Conversion Point #5: Why Do I Need to do Anything?

Many people spend most of their career saving their hard-earned money, just to find out they’ve reached a point where they feel they can’t spend it all over their expected lifetime. Between military pension income, Social Security income, and other income sources, these folks find they have more than enough income to meet their needs. Then, they reach age 73 and face required minimum distributions. Now, they’re stuck recognizing and paying taxes on income they don’t need or want.

That’s the whole point of converting to a Roth IRA, right? You pay the taxes up front, so you don’t have to pay any down the road. While that might be true, here are some considerations:

• How sure are you that the taxes you’re paying down the road would be more than what you’d be paying now? First, think in dollars to dollars, using Point 4 above. Just as importantly, think about the time value of money.
• Your IRA account grows tax-free. The IRS only taxes IRA distributions.  In the worst-case scenario, your traditional IRA is growing tax-deferred. You’re only taxed when the money is distributed. This point is important enough to re-emphasize: “Your money grows without tax consequence while in your IRA.” I hear people say they converted to a Roth IRA to enjoy the tax-free growth of their money. However, your money grows tax-free in a traditional account, too. Additionally, since it was pre-tax money, you have more of it working for you over time.
• If you’re charitably inclined, you have options. Say you’ve got more money than you know what to do with, and now you’re forced to take withdrawals. Simultaneously, you’ve always wanted to give back to a cause that you believe in. With qualified charitable distributions (QCD), you can withdraw up to $100,000 under a QCD. For married individuals, this is $100,000 per person, provided the money comes from separate IRAs. This is specifically for people who reach age 70 ½ and want to avoid RMDs.
• If you’re looking into long-term care or are worried about outliving your money, longevity insurance is an option. Longevity insurance, in the form of a qualified longevity annuity contract (QLAC), can be a highly attractive investment for individuals concerned about outliving their savings. A QLAC allows an investor to invest in an annuity at an older age (usually 65-70), then start receiving payouts at a later age, as late as 85. While the details of a QLAC are too much for this article, this could be a means to ensure that you don’t outlive your money while deferring your RMD.
• How sure are you that the tax rules will stay in place until you retire? Let’s look at a brief history of retirement accounts:

• 1974: Traditional IRAs were established under the Employee Retirement Income Security Act (ERISA)
• 1978: 401(k)s were established
• 1986: TSP is established as part of the Federal Employees’ Retirement System Act
• 1997: Roth IRAs were established as part of the Taxpayer Relief Act
• 2001: TSP becomes available for servicemembers
• 2012: Roth TSP options become available
• 2018: Employer contributions become available for military TSP account holders
• 2026: TSP allows in-plan Roth conversions

If you were a twenty-something employee back in the 1970s (or 80s, 90s, etc.), you probably would have never foreseen some of the opportunities that have happened over the past 40 years. If you’re a twenty-something servicemember today (or 30-something or 40-something), you should be asking yourself:

How sure am I of the future? Am I willing to pay taxes today in exchange for a benefit that might be different tomorrow?

For those of you harboring doubts, all you need to do is look at Social Security reform, military retirement reform (remember the Final Pay retirement system? No one does, anymore), to know that there are times when the government tries to claw back money when it sees an opportunity.  Conversely, the above list of opportunities also shows that there are times when the government seeks ways to encourage people to save for their future.

Bottom line: The only certainty is the taxes you’ll pay today on a Roth conversion. Currently, you can defer that choice and let that money grow tax-deferred. Whether that is a wise move or a move you might wish you could take back is a matter of future changes that no one can predict. The younger you are, the more you should take this under advisement.

Conclusion

This primer is by no means a substitute for sound financial advice based upon an analysis of your particular situation. Tax planning can be a very demanding undertaking, particularly if you want to maximize your after-tax income. If that’s your objective, you may want to discuss in more depth with a fee-only financial planner in your area. If simplicity is your primary goal, you may want to get a second opinion. Just keep in mind that it’s easier to postpone this decision than it is to undo it.

Meet the Author

Forrest Baumhover

Forrest Baumhover is a Certified Financial Planner™ and enrolled agent. As a retired naval officer, Forrest helps veterans, transitioning service members and their families address the financial...

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