Roth in-plan conversions in the TSP: what changed in 2022 and why it is still underused.

For most of the TSP’s history, federal employees who wanted Roth dollars had only one option: contribute Roth going forward. There was no way to convert existing Traditional TSP balances into Roth TSP balances inside the plan. If you wanted to do a Roth conversion, you had to roll the Traditional balance out of TSP into a Traditional IRA, then convert the IRA to a Roth IRA.

That changed in September 2022. The FRTIB implemented a feature called Roth in-plan conversions, which allows participants to convert a portion of their Traditional TSP balance into Roth TSP inside the plan, without rolling anything out. The feature has been available for several years now, but many federal employees still do not know it exists — or do not understand when it makes sense to use it.

What an in-plan Roth conversion actually is.

A Roth in-plan conversion is the movement of pre-tax money from a participant’s Traditional TSP balance into their Roth TSP balance. The amount converted is included in the participant’s gross income for the year of the conversion and is subject to ordinary federal (and usually state) income tax in that year. Once in the Roth TSP balance, the converted dollars grow tax-free and are not subject to lifetime RMDs (subject to the same TSP-specific implementation caveat we covered earlier).

The conversion is irrevocable. Once Traditional TSP money has been moved to Roth TSP, it cannot be moved back. The income-tax liability is incurred in the year of the conversion, regardless of when you actually withdraw the converted dollars.

When an in-plan conversion makes sense.

The case for an in-plan Roth conversion is essentially the case for any Roth conversion: convert dollars when your current marginal tax rate is lower than your expected future marginal tax rate, and pay the tax now from outside the conversion if possible.

For federal employees, the most common inflection points for a conversion are:

• A low-income year between retirement and the start of RMDs (often called the “gap year” or “fill year”), when there is room in the lower brackets to convert meaningful Traditional dollars.
• A year in which the participant has unusually low income (sabbatical, unpaid leave, between-jobs window, early retirement).
• Years in which the participant is below the IRMAA tier thresholds and wants to convert up to (but not past) the next tier.
• Years in which the participant expects to be in a higher bracket in the future, due to RMDs, Social Security taxation, or other expected income.

When an in-plan conversion does not make sense.

The case against converting is also straightforward. A conversion makes little sense when:

• Your current marginal rate is already equal to or higher than your expected future rate. You would be paying more tax now than you would pay later, for no offsetting benefit.
• You do not have outside funds to pay the conversion tax. Paying the tax from the conversion itself shrinks the converted balance and creates a double cost — tax on the conversion, plus reduced future Roth growth.
• The conversion would push you into a higher IRMAA bracket two years later, with the Medicare premium surcharge exceeding the lifetime tax savings of the conversion.
• You intend to roll the Traditional TSP balance to a Traditional IRA immediately after retirement, where more flexible conversion strategies are available.

How the TSP handles the mechanics.

The TSP allows participants to elect an in-plan Roth conversion through My Account at tsp.gov. The election specifies the dollar amount or percentage of the Traditional balance to convert, and the TSP processes the conversion at the next available valuation date. The converted amount appears as a taxable distribution on Form 1099-R for the year of the conversion.

There is no withholding requirement on conversions — unlike a withdrawal, the TSP does not automatically withhold federal income tax from a conversion. The participant is responsible for paying the tax through estimated payments or through the year-end tax return. Many participants make the mistake of forgetting this, only to discover an underpayment penalty the following April.

The interaction with the 5-year rule.

Each in-plan conversion starts its own 5-year clock for the purpose of determining whether the earningson the converted amount can be withdrawn tax-free before age 59½. The converted amount itself can be withdrawn tax-free at any time (since it has already been taxed), but the earnings on that amount are subject to the 5-year rule if withdrawn before 59½.

This is rarely a binding constraint for federal employees considering conversions near or after retirement, but it matters for younger participants thinking about early in-service withdrawals.