Starting in 2026, the Federal Thrift Savings Plan (TSP) began allowing in-plan Roth conversions.
Think of the TSP as the 401(k) for federal employees, including military members. The TSP has traditionally been relatively slow to adopt newly allowed 401(k) features. For example, it didn’t start allowing Roth contributions at all until May 7, 2012, long after I had separated from military service. That’s 11 years after Roth 401(k) contributions were allowed. Likewise, in-plan conversions were first allowed in 401(k) plans in 2010, but it took until 2026 before the TSP got up to speed.
At any rate, TSP participants can now do as many as 26 in-plan Roth conversions every year, although they cannot yet be automated. The TSP won’t withhold taxes on conversions either, but that issue is easily dealt with, if necessary, by changing withholdings or just making quarterly estimated payments as needed.
The TSP Does Not Offer a Clean Mega Backdoor Roth IRA Process
While in-plan conversions can be useful for a few people, the main reason people get excited about them is because they are one of the steps required to do the Mega Backdoor Roth IRA process, which helps people whose plans allow it to put tens of thousands of dollars into Roth accounts every year. Unfortunately, this process is not really permitted in the TSP for two reasons.
The first reason is that true employee after-tax (not Roth) contributions are still not permitted for most federal employees most of the time. Military members deployed to combat zones get an exception to that rule.
The second reason is that there is no separate after-tax subaccount in the TSP. In the 401(k) we put into place here at WCI, employees have access to three subaccounts:
- Tax-deferred
- Roth
- After-tax
My entire $72,000 contribution in 2026 went into the third subaccount, the after-tax account, before an immediate Roth conversion of that $72,000. That after-tax subaccount doesn’t exist in the TSP. That means any Roth conversion has to come out of the first subaccount, the tax-deferred account. In the TSP, those tax-exempt contributions made by military members during deployments are in the tax-deferred account. So, any conversions done must be pro rated between tax-deferred money and tax-exempt money. If you have $100,000 in tax-deferred money and $25,000 in tax-exempt money and wish to do a $25,000 Roth conversion, you can’t just convert the tax-exempt money. That $25,000 conversion would be $20,000 of pre-tax money (with the associated tax bill) and $5,000 of tax-exempt money.
It’s not ideal.
Savvy people, though, have a bit of a workaround. Most military doctors should do Roth contributions pretty much all the time. This is because they will either soon separate from the military and have a much higher marginal tax rate (especially when they choose to live in a state with state income tax), or they will stay in until they qualify for a pension—which, together with Social Security, will fill most of the lower brackets during retirement. Either way, Roth contributions are probably the right move.
And when Roth contributions are the right move, Roth conversions of any tax-deferred money (maybe from a match?) are probably also the right move. As long as your TSP is always all Roth all the time, you can still do a Mega Backdoor Roth IRA with those combat zone tax-exempt contributions.
More information here:
Personal Finance for Military Physicians
Specializing in the Military
A Wacky $500 Rule
The TSP also has another wacky Roth conversion rule that doesn’t apply in any other 401(k) I’ve ever seen. For lack of an official name, we’ll call it the $500 Rule. I take it from page 4 of the TSP In Plan Roth Conversion Handbook. The TSP calls this the “leave behind” amount. I’m sure there’s some sort of administrative reason for it, but I can’t for the life of me figure out what that reason is.
Annoying, but it shouldn’t have any huge long-term financial effects.
You Cannot Convert Unvested Amounts
Part of the TSP “match” is called the Agency/Service Automatic (1%) Contributions. These do not vest until after two years of service, and they aren’t eligible for Roth conversions until they vest.
Mutual Fund Window Investments Not Eligible
In 2022, the TSP opened a “mutual fund window” that allows participants to invest in funds that aren’t in the TSP. However, the money in those investments is NOT eligible for Roth conversions. That doesn’t seem so bad until you recall that the TSP requires you to have the same asset allocation on the pre-tax side as on the Roth side. So if you want to convert as much as possible every time you do a Roth conversion, you have to move the money out of those mutual funds and back into the standard TSP funds first to do the conversion. Again, it’s kind of a pain.
More information here:
The G Fund (Finally) Gets Its Day in the Sun
Should You Do TSP Roth Conversions?
While the answer for most military members and many others expecting pensions is “probably,” this is the most complicated question in personal finance and investing. The main issue to deal with is a comparison of current marginal tax rates to future marginal tax rates for each dollar converted. However, many other factors have to be considered, as outlined in this post. Certainly, the more tax-exempt money you have in your tax-deferred TSP subaccount, the better deal you get doing Roth conversions.
The Bottom Line
Overall, it’s good to see the TSP finally adding new features, even if this particular rollout is less than ideal due to the quirky nature of the TSP. Twenty years ago, I would have described the TSP as the best 401(k) in the country. That’s unfortunately not the case anymore. But it’s still better than many.
What do you think? Will you be doing any in-plan conversions in the TSP? Why or why not?
