For a few years, a lot of federal employees were watching the tax situation closely. Wondering if rates were about to go up, and whether they should act before something changed.
In July 2025, Congress answered that question. The One Big Beautiful Bill Act made the lower tax rates from the 2017 Tax Cuts and Jobs Act permanent. The brackets most people are sitting in today, 10%, 12%, 22%, 24%, those are staying.
And separately, in January 2026, the TSP introduced something federal employees had been asking about for years: the ability to convert traditional TSP funds to Roth directly inside the plan. No rollover required.
Those two things together make this a year worth paying attention to.
Your Traditional TSP Has a Tax Bill Attached to It
Every dollar in a traditional TSP grew tax-deferred. You got a tax break going in, and the account has been growing ever since. But the government hasn’t been paid yet. Think of it this way: the balance on your TSP statement has a silent partner, and that partner is the IRS. A portion of every dollar in that account is already spoken for. You settle up when you take money out.
And eventually, you are required to take money out whether you need it or not. These are called Required Minimum Distributions, or RMDs. The IRS sets the schedule. For most people currently approaching retirement, that starts at age 73. If you were born in 1960 or later, it’s age 75.
You don’t get a vote on the timing.
For many retired federal employees, that RMD lands on top of a FERS or CSRS pension, and for most, Social Security as well. Suddenly the bracket you’re in is higher than you planned for. More of your Social Security becomes taxable. Medicare premiums can climb through IRMAA surcharges, which in 2026 kick in at $109,000 of income for a single filer and $218,000 for a couple filing jointly. And it works as a cliff system, meaning just one dollar over a threshold triggers the full surcharge for that entire tier, which can add hundreds or even thousands of dollars per year in Medicare costs.
It’s a tax squeeze most people don’t see coming. And it’s one of the main reasons a Roth conversion is worth thinking about now, while rates are known and the new TSP tool is available.
What a Roth Conversion Actually Does
A Roth conversion moves money from your traditional TSP into a Roth TSP account. You pay the taxes now, at today’s rates. From that point forward, the growth is tax-free. Qualified withdrawals are tax-free. And Roth balances are not subject to RMDs during your lifetime, which means you keep control over when and how you draw down that money.
The New TSP Option: In-Plan Conversions Are Now Live
As of January 28, 2026, TSP participants can convert traditional TSP balances to Roth directly inside their TSP account. You log into My Account at TSP.gov, request the conversion, and specify the amount. No rollover to an outside IRA required.
A few details worth knowing:
Active employees, separated participants who still maintain a TSP account, and spousal beneficiaries are all eligible and can request up to 26 conversions a year. Non-spouse beneficiaries and alternate payees are not. The minimum conversion amount is $500, and you must maintain at least $500 in each traditional TSP source after converting, so you cannot convert every last dollar from a given source.
One important detail on taxes: the TSP has no mechanism to withhold taxes from the conversion itself. The full converted amount lands in your Roth TSP, and you will owe ordinary income taxes on that amount for the year. You need to have funds set aside outside of the TSP to cover that tax bill, whether from savings, a checking account, or other non-retirement funds. Using money from inside the TSP to pay the taxes would mean taking an additional taxable distribution, which defeats part of the purpose and can trigger penalties if you’re under 59 and a half.
In-plan conversions are irrevocable. Once processed, the transaction cannot be reversed or changed. That’s not a reason to avoid them. It’s a reason to think carefully before acting, and to work with a financial professional who understands the federal benefits landscape before you pull the trigger.
When Does It Actually Make Sense?
A Roth conversion isn’t right for every situation. But there are clear cases where running the numbers makes a lot of sense.
- You’re in a lower-income year. Retired early, recently separated from federal service, or had income drop for any reason? The gap between leaving work and when pension, Social Security, and RMDs kick in is often the best window to convert at a lower rate. For many federal employees, that window is in their late 50s or early 60s.
- You’re in your early-to-mid 60s, or even your late 50s if you separated early. You may have a decade or more before RMDs begin. Converted Roth funds have time to grow tax-free, and you’re reducing the future balance that will eventually be forced out through RMDs.
- You want more predictability later. Roth withdrawals don’t count toward the income thresholds that trigger higher Medicare premiums or make more of your Social Security taxable. That’s real money, year after year.
- You want to leave something to your family. Tax-free growth passed to heirs is a meaningful advantage, even accounting for the post-SECURE Act rules around inherited accounts.
- You have funds outside the TSP to cover the tax bill. Since taxes can’t be withheld from the conversion itself, this strategy only works cleanly if you have money set aside elsewhere to pay what you’ll owe. Going in without that plan can create cash flow problems at tax time.
The Psychology Working Against You
There’s a reason most people put this off. Behavioral economists call it present bias. The pain of writing a check to the IRS today feels much more real than the benefit of saving money fifteen years from now.
The tax bill is immediate. The future savings are abstract. So most people delay even when the math says otherwise. The numbers often favor action. Your psychology often wins anyway.
A Few Things to Watch Out For
Converting too much in one year can push you into a higher bracket and, if you’re on Medicare, trigger those IRMAA surcharges. The goal is filling up your current bracket without crossing into the next one. Spreading conversions over several years, sometimes called a ladder approach, often produces better tax outcomes than one large move.
On the tax payment side, plan ahead. The converted amount will show up as income on your tax return for the year. If you don’t adjust your withholding or make estimated tax payments, you could face an unexpected bill and a potential underpayment penalty in April. Your CPA or financial planner can help you size the conversion and set aside the right amount so there are no surprises.
And as a reminder, in-plan conversions inside the TSP are permanent. There is no reversing them after the fact. That makes the planning conversation beforehand more important, not less.
What to Do Next
Pull your most recent TSP statement. Know what bracket you’re in this year. If you’re within ten years of retirement, or you’ve already left federal service, it’s worth a conversation with a financial planner who actually understands FERS, CSRS, and how your federal benefits fit together. Not all planners do.
Roth conversions aren’t the right move for everyone. But for the right person, done thoughtfully and in the right year, they can take a significant amount of future tax uncertainty off the table.
With tax rates locked in and the conversion option now available inside the TSP itself, the opportunity has never been easier to act on.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Investing involves risk including loss of principal. No strategy assures success or protects against loss.
This information is not intended to be a substitute for individualized tax advice. We suggest that you discuss your specific tax situation with a qualified tax advisor.
Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA.
Neil Cain is a certified financial planner with Capital Financial Planners. If you don’t feel confident in your current or future retirement withdrawal strategy and would like feedback, you can register for a complimentary Retirement Readiness Meeting. For topics covered in even greater depth, see our YouTube page.