TSP In-Plan Roth Conversions: How to Avoid the Tax Bomb

The Thrift Savings Plan now allows in-plan Roth conversions — a long-awaited feature that lets federal employees move money from their traditional TSP balance to their Roth TSP balance without leaving the plan. On paper, it is a powerful tax-planning tool. In practice, it is one of the easiest ways to accidentally trigger a five-figure tax bill, push yourself into a higher Medicare premium bracket, or undo years of careful retirement planning.

If you are within five years of federal retirement and you are thinking about converting any portion of your TSP, read this first.

What an In-Plan Roth Conversion Actually Does

A Roth conversion takes pre-tax money — money you deferred taxes on when you contributed — and reclassifies it as Roth money. You pay ordinary income tax on every dollar converted in the year of the conversion. In exchange, that money grows tax-free for the rest of your life and qualified withdrawals are tax-free.

The TSP rolled out in-plan conversions to give participants the same flexibility 401(k) plans have offered for years. Before this change, the only way to convert TSP money to Roth was to roll it out to an IRA and convert there — a process that triggered other complications, including loss of the G Fund and the TSP’s low expense ratios.

Who the Conversion Helps

Roth conversions can make sense if you expect to be in a higher tax bracket in retirement than you are today, if you want to reduce the size of your future Required Minimum Distributions, or if you want to leave tax-free money to heirs. Federal employees who plan to keep working part-time in retirement, who have large pension and Social Security income, or who are concerned about future tax-rate increases all have a real case for converting at least some of their balance.

Mistake #1: Converting Too Much in One Year

Every dollar you convert is added to your taxable income for the year. A federal employee with $300,000 in traditional TSP who converts the entire balance in one tax year just gave themselves an extra $300,000 of ordinary income — likely pushing them from the 22% bracket all the way into the 35% bracket.

The smart approach is to convert in smaller annual slices that “fill up” your current tax bracket without spilling into the next one. Many federal employees find the sweet spot is the gap years between retirement and age 73, when earned income drops, but Required Minimum Distributions have not yet started and Social Security may not have begun. Our guide to Roth TSP versus traditional TSP walks through the bracket math in more detail.

Mistake #2: Forgetting About IRMAA

Medicare Part B and Part D premiums are based on your Modified Adjusted Gross Income from two years prior. The Income-Related Monthly Adjustment Amount — IRMAA — kicks in at relatively modest income levels and increases premiums in steep, cliff-edge tiers. For 2026, a married couple filing jointly with MAGI just $1 over $212,000 pays about $74 more per month per person in Part B premiums than a couple just below that threshold.

A Roth conversion that pushes you across an IRMAA threshold can cost you and your spouse more than $1,700 in extra Medicare premiums for the year — and the surcharge applies for a full 12 months once the two-year lookback catches up. If you are already on Medicare or about to enroll, run the conversion amount through the IRMAA brackets before you click the button.

Mistake #3: Converting Without Cash to Pay the Tax

This is the one that quietly destroys long-term value. If you convert $50,000 and then withdraw $12,000 from that same converted balance to pay the federal tax bill, two bad things happen.

First, you have shrunk the amount actually growing tax-free in the Roth account. Second, if you are under age 59½, the withdrawn amount can trigger a 10% early withdrawal penalty plus ordinary income tax on the withdrawal itself — even though the conversion was supposed to be tax-favorable. Roth conversions only work financially if you can pay the conversion tax with money from outside the retirement account.

Mistake #4: Converting in a Year With Other Income Spikes

Federal employees often retire in a year that already has unusual income on it: a final-year salary plus a lump-sum annual leave payout (which can be substantial — see our annual leave payout guide), maybe a TSP withdrawal to bridge to the first pension check, possibly a spousal Social Security claim. Stacking a Roth conversion on top of all of that is how a routine retirement turns into a tax disaster.

The general rule: do not convert in your separation year unless you have run a full projection. The first full calendar year of retirement is almost always a better window because earned income is lower and you have not yet started Required Minimum Distributions.

Mistake #5: Ignoring State Taxes

Federal income tax is the conversation everyone has. State income tax is the one that surprises people. If you convert while you are still living in a high-tax state — say, you plan to retire to Florida or Tennessee in three years but you are converting now while still in California or New York — you are paying state income tax on the conversion that you might have legally avoided by waiting.

The reverse is also true. If you converted and then move back to a high-tax state mid-year, residency and apportionment rules can pull part of the conversion back into the state tax base. Talk to a tax preparer who knows multi-state federal retirement situations before you convert across a planned move.

How the TSP Conversion Process Actually Works

Inside My Account on TSP.gov, in-plan Roth conversions are handled through a specific online request. You select an amount or percentage of your traditional balance to convert, and the TSP processes it — moving the money from the traditional sub-account to the Roth sub-account. The TSP will issue a Form 1099-R showing the converted amount as a taxable distribution, even though no money actually left the plan.

A few important mechanical points. The TSP will not withhold federal taxes on an in-plan conversion by default — you are responsible for paying estimated taxes or increasing withholding on other income. Conversions are irrevocable; the old “recharacterization” loophole that allowed you to undo a Roth conversion was eliminated by the 2017 tax law and never came back. And the converted money starts a new five-year clock for penalty-free withdrawal of the converted principal if you are under 59½.

A Sensible Conversion Game Plan for Federal Employees

If you decide a Roth conversion makes sense for you, follow a process rather than a gut feeling. Pull last year’s tax return and identify your current marginal bracket. Project your retirement income from your FERS pension, Social Security, and TSP withdrawals — our federal retirement tax planning guide gives you the framework. Identify the years between retirement and age 73 where you have headroom in a lower bracket. Calculate the maximum conversion amount that fills that bracket without spilling over. Confirm you have outside money to pay the conversion tax. Verify the conversion will not push you across an IRMAA threshold if you are 63 or older. Then convert.

That sequence — bracket projection, IRMAA check, outside-cash check — handles 90% of the mistakes federal employees make.

The TSP’s Newest Tool Is Not for Everyone

In-plan Roth conversions are powerful for the right person at the right time. They are also a fast way to give the IRS money you did not need to give it. The TSP has made the mechanics easy. The judgment about whether, when, and how much to convert is still entirely on you.

Federal employees often discover that the conversion question is downstream of bigger questions: what does my full retirement income picture look like, how do my pension and Social Security interact with my TSP withdrawals, and what tax bracket will I actually live in once I retire? Those are exactly the questions covered in our free Federal Retirement Workshop. Walking through your numbers with someone who has seen hundreds of federal retirement scenarios is usually worth more than reading another article.

Reserve your seat at a free Fed Pilot workshop →