Roth TSP In-Plan Conversions and the Five-Year Rule: Avoiding Tax and Penalty Surprises

A recent column, “Roth TSP In-Plan Conversions: What They Mean for Your Taxes”, presents information and rules with respect to Roth Thrift Savings Plan (TSP) in-plan conversions. Since January 28, 2026, when Roth TSP in-plan conversions started, the amount of traditional TSP account money that has been converted to Roth TSP accounts has exceeded $1 billion.

This column discusses the five-year rules that apply to Roth TSP in-plan conversions. After a TSP participant performs a Roth TSP in-plan conversion, there are two separate five-year rules that apply to the participant’s withdrawals from their Roth TSP account balance. These five-year rules are similar to, but not completely the same, as those that apply to converted Roth IRAs.

The two Roth TSP in-plan conversion five-year rules seem similar, which may confuse TSP participants. It is therefore important to understand the key differences:

1. One five-year rule applies only to the accrued earnings in a TSP participant’s Roth TSP balance. This rule determines whether the TSP participant pays income tax on the Roth TSP accrued earnings when they are withdrawn.
2. The other five-year rule applies to the money a TSP participant converts from their traditional TSP account to their Roth TSP account. This rule determines whether the participant pays a 10 percent early withdrawal penalty tax on the money converted when the money is withdrawn from the Roth TSP account.

Note: Those participants who are aged 59.5 or older and whose Roth TSP account is at least five years old will meet the Internal Revenue Service (IRS) requirements for both five-year rules. That means that the TSP participant can make withdrawals from their Roth TSP balance, tax-free and penalty-free.

The following example illustrates:

Example 1. Pamela, age 62, made her first Roth TSP contribution on July 17, 2015. The five-year Roth TSP account ownership begins on January 1 of the year that a Roth TSP participant made their first Roth TSP contributions. Therefore, as of January 1, 2020, Pamela met the five-year ownership requirement. Since Pamela is over 59.5, she can make tax-free and penalty-free withdrawals from her Roth TSP account.

Five-Year Rule for Roth TSP Accrued Earnings

The first five-year rule only applies to the accrued earnings in a TSP participant’s Roth TSP balance and determines whether the TSP participant can withdraw those earnings income tax-free. Earnings refer to money that has accrued over time from the Roth TSP participant’s investments. Roth TSP earnings are not taxed if the distribution is qualified. Roth TSP account earnings become qualified and can be withdrawn tax-free when the earnings meet both of the following requirements: (1) five years have passed since January 1 of the calendar year in which the TSP participant made their first Roth TSP contributions, or the TSP participant’s first Roth TSP in-plan conversion if the conversion creates the TSP participant’s Roth TSP balance; and (2) the TSP participant has reached age 59.5, or has a permanent disability, or is deceased.

If the Roth TSP account earnings do not meet both requirements, then they are not qualified and the TSP participant will pay income tax when they are withdrawn.

The following two examples illustrate:

Example 2. Richard, aged 57, recently retired from federal service. He owns both a traditional TSP account and a Roth TSP account. Richard made his first Roth TSP contribution on March 2, 2017. His Roth TSP account became qualified as of January 1, 2022 (five years since January 1 of the year Richard made his first Roth TSP contribution). In order to not pay income tax on Roth TSP withdrawals, Richard has to wait until he is at least age 59.5.

Example 3. Felix, age 68, recently retired from federal service on June 30, 2026. Felix made his first Roth TSP contribution on July 24, 2023. Felix’s Roth TSP account will not become qualified until January 1, 2028 (five years since January 1 of the year Felix made his first Roth TSP contribution). Although Felix is over age 59.5, he has to wait until at least January 1, 2028 to withdraw from his Roth TSP account in order to avoid paying income tax on his Roth TSP account earnings.

Five-Year Rule for Converted Traditional TSP to Roth TSP Amounts

The second five-year rule applies only to money a TSP participant converts from their traditional TSP balance to their Roth TSP balance. Each Roth TSP in-plan conversion that a TSP participant performs starts a five-year clock that begins on January 1 of the year of each conversion. If a TSP participant makes a withdrawal that includes traditional TSP contributions, and the TSP participant converted the funds within five years of conversion, then the TSP participant must pay income tax on the converted traditional TSP amount and a 10 percent early withdrawal penalty to the IRS. The 10 percent penalty applies to TSP participants younger than age 59.5. TSP participants older than 59.5 who make withdrawals within the five-year period are not subject to the 10 percent penalty.

The five-year rule applies to the traditional TSP contribution, agency matching contributions and automatic one percent contributions for Federal Employees Retirement System (FERS) employees, and traditional qualified retirement account and traditional IRA direct rollovers to the traditional TSP account. It does not affect accrued earnings on that money. This IRS rule is designed to prevent TSP participants under the age of 59.5 from avoiding the early withdrawal penalty by converting to Roth TSP. Note that this five-year rule is separate from the five-year rule that determines whether a TSP participant’s Roth TSP earnings are qualified and can be withdrawn tax-free.

The following example illustrates:

Example 4. Henry, age 63, performed a $20,000 Roth TSP in-plan conversion on March 5, 2026. Henry will have to wait until January 1, 2031 to make a penalty-free withdrawal of the $20,000 in order to avoid paying income tax on the $20,000 conversion.

Federal employees and retirees who have additional questions on the five-year rules as they apply to Roth TSP in-plan conversions are advised to talk to a knowledgeable tax professional.