TSP Roth In-Plan Conversions Coming in 2026: The Good, the Bad, and What to Consider

Starting January 28, 2026, the TSP is rolling out Roth in-plan conversions—a feature that lets you convert traditional TSP balances to Roth without leaving the plan. For military members and federal employees, this opens up new tax planning opportunities. But it's not a slam dunk for everyone.

Here's what's good, what's bad, and what you need to think through before converting.

The Good

Tax-Free Growth and Withdrawals

Once money is in your Roth TSP, it grows tax-free and comes out tax-free in retirement (assuming you meet the 5-year rule and are 59½ or older). If you expect to be in a higher tax bracket later—or if tax rates rise—locking in today's rates can save you significantly.

No More Workaround Required

Previously, converting traditional TSP to Roth required rolling money out to a traditional IRA, then converting to a Roth IRA. That meant leaving the TSP's low-cost funds. Now you can convert and stay in the plan.

Tax Diversification

Having both traditional and Roth balances gives you flexibility in retirement. You can pull from traditional accounts in low-income years and Roth in high-income years—managing your tax bracket strategically.

No Required Minimum Distributions

Roth accounts aren't subject to RMDs during your lifetime. This means more control over your money and potentially lower Medicare premiums (since Roth withdrawals don't count as taxable income).

The Bad

You Owe Taxes Now—And the TSP Won't Withhold Them

This is the big one. When you convert, the entire amount becomes taxable income for that year. Convert $50,000? Your taxable income just increased by $50,000. And unlike a 401(k) distribution, the TSP will not withhold taxes. You need to pay from outside funds or risk underpayment penalties.

The $500 Holdback Requirement

You must leave $500 in each traditional source account (traditional contributions, tax-exempt contributions, agency automatic 1%, and agency matching). Why? The TSP says it's to support "potential future payroll corrections." This is a frustrating limitation—you can't fully convert out of traditional even if you want to.

The Pro Rata Rule Kills the CZTE Advantage

This is the biggest disappointment for military members. If you have tax-exempt combat zone contributions mixed with traditional contributions, you can't selectively convert just the tax-exempt money. The TSP applies a pro rata rule—conversions pull proportionally from both.

Example: You have $100,000 traditional TSP, of which $20,000 is tax-exempt CZTE contributions. If you convert $10,000, only $2,000 comes from tax-exempt and $8,000 from taxable. You can't cherry-pick the tax-free money. This significantly limits what could have been a powerful feature for deployed military members.

Bracket Creep Risk

A large conversion could push you into a higher tax bracket, making the conversion more expensive than anticipated. If you're already in the 24% bracket and convert $30,000, part of that could be taxed at 32%.

It's Irrevocable

Once you convert, there's no going back. The old "recharacterization" option that let you undo Roth conversions was eliminated in 2018. If the market drops after you convert, you've paid taxes on money that's now worth less.

The 5-Year Rule Applies

If you withdraw converted funds within 5 years and you're under 59½, you'll owe a 10% early withdrawal penalty on the converted amount. This matters for younger federal employees and military members.

Important Considerations

Who Should Consider Converting

• Early career employees: Lower income years mean lower tax rates on conversions
• Those expecting higher future taxes: Whether from career advancement or potential tax law changes
• Retirees with low-income years: The gap between retirement and Social Security/pension income starting can be a conversion opportunity
• Federal employees without CZTE contributions: If your traditional balance is all taxable anyway, the pro rata issue doesn't affect you

Who Should Think Twice

• Military with CZTE contributions: The pro rata rule means you can't isolate your tax-exempt money—consider a rollover to a Roth IRA instead where you may have more control
• High earners already in top brackets: You're paying maximum rates on conversions
• Those without outside funds for taxes: Using TSP money to pay conversion taxes defeats much of the benefit
• People close to retirement: Less time for tax-free growth to offset the upfront tax cost
• Anyone expecting lower taxes in retirement: Why pay more now?

The Mechanics

• Minimum conversion: $500
• Maximum conversions per year: 26 (with the $500 minimum and $500 holdback requirements, you're unlikely to hit this limit)
• You must leave $500 in each traditional source
• If you have RMDs, you must take them before converting

The Bottom Line

TSP Roth in-plan conversions are a step in the right direction, but like many TSP features, the implementation leaves something to be desired. The pro rata rule is a significant limitation that undermines what could have been a powerful tax planning tool—especially for military members hoping to leverage CZTE contributions.

For federal employees without combat zone contributions, this is a useful new option. For military members with tax-exempt money in their TSP, the in-plan conversion may not be the best path. A rollover to a Roth IRA outside the TSP might give you more flexibility.

As always, run the numbers before you convert.