A recent FEDZONE column (“TSP Announces Start of Roth TSP In-Plan Conversions”) presented an overview of the newest Thrift Savings Plan (TSP) option. Starting January 28, 2026, traditional TSP participants for the first time will have the option of converting portions of their traditional TSP account to the Roth TSP account, called a Roth TSP in-plan conversion.
Traditional TSP participants who are active participants (this includes current federal civilian employees and active-duty uniformed service members), separated and retired traditional TSP participants, and spouse beneficiary traditional TSP participants are eligible to perform a Roth TSP in-plan conversion. Because of the federal and state income tax consequences of Roth TSP in-plan conversions, any traditional TSP participant considering a Roth TSP in-plan conversion is advised to first consult with a tax advisor. The tax advisor can help the traditional TSP participant decide whether a Roth in-plan conversion could be advantageous and when is the best time to perform a conversion. For example, many individuals choose to do Roth IRA conversions during years that they have less taxable income and therefore in a low overall (federal and state) marginal tax bracket.
| When deciding whether a Roth in-plan conversion is appropriate for a traditional TSP participant, the traditional TSP participant should consider these questions: | |
| A Roth in-plan conversion might be right for a traditional TSP if the traditional TSP participant answers “yes” to these questions: | A Roth in-plan conversion might NOT be right for a traditional TSP participant if the traditional TSP participant answers “yes” to these questions: |
|
|
Five-year rules that apply to Roth TSP in-plan conversions
After a traditional TSP participant performs a Roth in-plan conversion, there are two separate five-year rules that apply to withdrawals from the participant’s Roth TSP balance.
The rules seem similar which may make things more complicated. It is important to understand the key differences:
- The first five-year rule applies only to the accrued earnings in the participant’s Roth TSP balance. This rule determines whether the participant pays federal and state income tax upon the withdrawal of those Roth TSP accrued earnings.
- The second five-year rule applies only to the money converted from the traditional TSP account balance to the participant’s Roth TSP balance. This rule determines whether the participant pays a 10 percent early withdrawal penalty on converted money.
Five-year rule for Roth TSP accrued earnings
The first five-year rule only applies to the accrued earnings in the participant’s Roth TSP balance and determines whether the participant can withdraw those earnings federal and state income tax-free. Accrued earnings refer to income (interest, dividends, capital gains) that has accrued over time from the participant’s TSP investments. Therefore, earnings on Roth TSP contributions that are included as part of Roth TSP in-plan conversions. Roth earnings are not taxed if the distribution is “qualified.” Roth TSP earnings become “qualified” and can be withdrawn tax-free when they meet both of these IRS requirements:
- 5 years have passed since January 1 of the calendar year in which the participant made his or her first Roth TSP contribution (or, if the participant has never contributed to the Roth TSP, the participant’s first Roth TSP in-plan conversion when the participant’s first conversion creates the participant’s Roth TSP balance). Note that Roth TSP has been available to federal employees since 2012.
- The participant has reached age 59.5, has a permanent disability, or is deceased.
If earnings do not meet both requirements, then they are not qualified, and the participant will pay income tax when the participant withdraws them. The following examples illustrate:
Example 1. Marie made her first Roth TSP contribution on July 27, 2019. For the purpose of the 5-year Roth TSP participation rule, Marie’s five-year period started on January 1,2019 and ends December 31, 2023. Marie is currently 60 and intends to perform her first Roth TSP in-plan conversion on February 3, 2026. Since Marie is over age 60 and it will be at least five years since January 1 of the year that Marie made her first Roth TSP contribution, Marie will not pay any federal or state income tax when her Roth TSP earnings are withdrawn.
Example 2. Steven is a federal employee aged 60 and has never contributed to the Roth TSP. Steven has a sizeable amount (almost $1.2 million) in his traditional TSP and starting in late January 2026, he intends to convert portions of his traditional TSP to the Roth TSP. When Steven performs his first Roth TSP in-plan conversion on January 28, 2026, he will create his Roth TSP account. In order for Steven to make income-tax free withdrawals from his Roth TSP account, Steven will have to wait until at least January 28, 2031 (the five-year anniversary of Steven’s first Roth TSP in-plan conversion).
Five-year rule for converted amounts
The second five-year rule applies only to money converted from a traditional TSP participant’s balance to the participant’s Roth TSP balance. Each time a Roth in-plan conversion a traditional TSP participant performs starts a five-year clock that begins on January 1 of the year of each conversion. If a Roth TSP participant makes a withdrawal that includes converted money within five years of conversion, then the Roth TSP participant must pay a 10 percent early withdrawal penalty tax to the IRS unless an exception applies, such as being age 59½ or older.
This five-year rule only applies to the money that the traditional TSP participant converted, not the earnings on that money. This IRS rule is designed to prevent traditional TSP participants under the age of 59½ from avoiding the early withdrawal penalty by converting their traditional account to a Roth TSP account. It is separate from the five-year rule that determines whether the participant’s Roth TSP earnings are qualified and can therefore be withdrawn tax-free. The following example illustrates:
Example 3. Margaret, age 55, has both a traditional TSP account and a Roth TSP account. She plans to retire at the full retirement age (FRA) of 57. Over the next two years, Margaret intends to contribute $20,000 a year to her Roth TSP account and to perform a one-time Roth TSP in-plan conversion of $50,000 on February 10, 2026. Starting when she is age 59.5, Margaret can make penalty-free (no 10 percent early withdrawal penalty) from her “contributory” Roth TSP account (she is at least age 59.5). But she has to wait until January 1,2031 to make penalty-free withdrawals from her Roth TSP in-plan conversion account. This is because she has to wait five years from January 1 of the year she performed her Roth TSP in-plan conversions (January 1, 2026),
link