TSP traditional to TSP Roth conversion possible in 2026

[James48843]

TSP to Offer In-Plan Roth Conversions in 2026​

Published: November 26, 2024
More in: Fedweek

By: FEDweek Staff
The TSP will begin offering account holders the option to convert part or all of their traditional investments to Roth status starting in 2026, officials said at the November meeting of the program’s governing board.

Under traditional investing, money is invested on a pre-tax basis but the investment and its earnings are taxable on withdrawal; under Roth investing, money is invested after-tax but is tax-free on withdrawal, as are the investment’s earnings if certain conditions are met. Roth balances also are not subject to required minimum distributions, which retirees must begin taking from traditional balances at age 73.

While investors may choose either for their personal investments, agency contributions for FERS employees (and military personnel) are only in traditional status.

A conversion would require paying taxes on the traditional balance equal to what would be required on a withdrawal, which “cannot be paid with TSP assets,” according to the presentation. It added that in the most recent participant survey, 24 percent “indicated understanding of Roth conversion and tax implications” and 35 percent said they would “likely or “extremely likely” to use a Roth conversion feature if offered.

The presentation also showed that of the $947 billion on investment with the TSP as of the end of October, $68 billion had been invested in Roth status. Of the nearly 7.2 million accounts held by current and former federal and military personnel, 2.7 million have money in Roth status.

More:

TSP to Offer In-Plan Roth Conversions in 2026

The TSP will begin offering account holders the option to convert part or all of their traditional investments to Roth status starting in 2026, officials

www.fedweek.com

 

[James48843]

TSP to Offer In-Plan Roth Conversions in 2026​

Published: November 26, 2024
More in: Fedweek

By: FEDweek Staff
The TSP will begin offering account holders the option to convert part or all of their traditional investments to Roth status starting in 2026, officials said at the November meeting of the program’s governing board.

Under traditional investing, money is invested on a pre-tax basis but the investment and its earnings are taxable on withdrawal; under Roth investing, money is invested after-tax but is tax-free on withdrawal, as are the investment’s earnings if certain conditions are met. Roth balances also are not subject to required minimum distributions, which retirees must begin taking from traditional balances at age 73.

While investors may choose either for their personal investments, agency contributions for FERS employees (and military personnel) are only in traditional status.

A conversion would require paying taxes on the traditional balance equal to what would be required on a withdrawal, which “cannot be paid with TSP assets,” according to the presentation. It added that in the most recent participant survey, 24 percent “indicated understanding of Roth conversion and tax implications” and 35 percent said they would “likely or “extremely likely” to use a Roth conversion feature if offered.

The presentation also showed that of the $947 billion on investment with the TSP as of the end of October, $68 billion had been invested in Roth status. Of the nearly 7.2 million accounts held by current and former federal and military personnel, 2.7 million have money in Roth status.

More:

TSP to Offer In-Plan Roth Conversions in 2026

The TSP will begin offering account holders the option to convert part or all of their traditional investments to Roth status starting in 2026, officials

www.fedweek.com

I’m looking forward to this. I’m still learning as I have been retired about 3 years now. I’m done moving, selling houses, etc, and now am ready to look harder at what will work best for minimizing my taxes in the future.

Since I retired, I ended up taking more then I had planned out to settle into retirement. Bought a new house and car, and then I had to do a roof unexpectedly. Now the big cash outlays are done, and I can figure out how much I should move to Roth going forward to reduce taxes on future income streams.

Has anybody here had experience moving Roth money, and did it actually save you taxes?

 

[FAAM]

Hi James. FYI I retired 3-yrs ago FERS at age 62 yrs 4 months: 38.5 years total of which the first 9.25 yrs was active-duty Army which I bought-back to have those years included in my FERS retirement annuity/pension computation. My wife still works for Fed Civil Service with 7 years in at lower paygrade than I was, after resigning from 17-yrs work full time for Non-Profit Organization (all she has is some 401k/IRA funds saved from that, all about $80k "non-Roth") -- she'll likely retire in a year or two, FERS also, about age 65-ish.
... About 3/4 of my ~ 850k TSP was non-Roth (about 2/3 of my wife's lesser-than-my total TSP will be ROTH when she retires, before converting any). We both agree with local financial-estate-planner/ retirement-planner we started consulting with about 3-years ago -- that it would be preferential for us to convert as-much of (most of), if not all of our non-Roth TSP & IRA(s) to ROTH -- within about 5 or 6 years if possible: that based on our joint financial income & estate situation/status & our plans for those, AND with what we think a good assumption - that over our remaining reasonable expected life-spans, that we don't expect our marginal tax-rates to go down much if at all, and may increase some (all told, not accounting for taxes paid to do Traditional-conversion-to-ROTH) as we expect our USA tax rates need to increase with other good citizens' rates to cover all the justified costs to operate our great nation, and start paying down on the obtuse Nat'l-debt and annual deficits, and more to account for extra costs due to un-halted global warming and overdue infrastructure investments (highways/bridges/etc.) that we've not kept up with.
.... Given our personal situation, plans and assumptions... we thought it best to try to have our TSP/IRA funds as ROTH with no additional federal taxes whenever withdrawn or passed on, not for the base amount(s) nor for any accumulated/compounded gains, and -- with no RMDs. We started our Conversion to Roth process about 2 years ago. That is necessarily a lengthy process given major factors that one must try to balance and/or optimize (in vast majority of cases I'd guess), such as tax-rates/ -brackets, MAGI considerations as they may play into how much of your Social Security is taxed annually (assuming you're on S.S.) and if you may have IRMA (and at what level) 2-years hence if you'll be signed up for Medicare & paying those premiums (talking here mostly regarding Part-B, & less so about Part-D).
... To this point, & seemingly for 2024 & 2025 tax years, the only way to convert TSP funds to ROTH was to Transfer traditional-TSP funds to your own Traditional-IRA (or sometimes transfer directly from TSP to a private qualified Retirement-savings-Annuity fund vehicle or such offered by consultants/brokers where in which your traditional-savings amount can be, I believe, converted as you desire to Roth [you still have to pay the taxes in the conversion]); then you convert your Traditional- to a ROTH-IRA in amounts and in the year you desire - and pay the requisite taxes for that. Starting in 2026, I suspect there still may be advantages (perhaps fewer rules or restrictions) doing your conversions this way - rather than doing so in TSP; yet it is great that TSP finally saw the light and will allow such conversions... and that they "finally" offered no RMDs to apply to TSP-Roth funds (I'm not up on that but think this is true now [?]).

Hope this is helpful. Good luck. If you want to discuss more, perhaps you can get a personal message to me via TSP-Talk, thought I am no expert!