Starting in 2026, the Federal Thrift Savings Plan (TSP), which functions similarly to a 401(k) for federal employees, will enable in-plan Roth conversions. Historically, the TSP has been slow to adopt features available in 401(k) plans, such as permitting Roth contributions only from May 7, 2012, and in-plan conversions starting in 2010. With the upcoming changes, participants will be allowed to perform up to 26 conversions annually, although these conversions can’t be automated. The TSP will not withhold taxes on these conversions, which can be managed through changing withholdings or making quarterly estimated payments.
However, the TSP does not facilitate a straightforward Mega Backdoor Roth IRA process. Most federal employees cannot make true employee after-tax contributions, and the TSP lacks a separate after-tax subaccount. This limitation means any Roth conversions must be prorated between tax-deferred and tax-exempt funds, which complicates the process for participants.
Most military personnel, particularly medical professionals, may benefit from consistently making Roth contributions due to their anticipated higher marginal tax rates upon separation or retirement. While the TSP’s changes are a step forward, the complex nature of Roth conversions remains a consideration. Current rules also restrict converting unvested amounts and investments in newly available mutual funds, further complicating the conversion landscape.
These developments reflect an effort to modernize the TSP, although many users may find the existing features less than ideal.
Why this story matters:
- Enhancements to TSP processing can ultimately impact retirement savings for federal employees.
Key takeaway:
- In-plan Roth conversions will be available in 2026, although the process has complexities that federal employees must navigate.
Opposing viewpoint:
- Some experts argue that the TSP continues to lag behind other retirement plans, making it less beneficial for federal employees.
