The Federal Retirement Savings Investment Board (FRTIB) has announced a final rule effective January 28, 2026, which introduces the option for in-plan conversions to a Roth Thrift Savings Plan (TSP). This long-awaited change allows TSP participants to switch their funds from traditional TSP accounts—those with pre-tax and tax-exempt balances—to Roth accounts, which are funded with after-tax dollars.
Understanding Roth In-Plan Conversion
A Roth in-plan conversion enables participants to transfer funds from a traditional account to a Roth account. While the amount converted will be subject to income tax in the year of conversion, any earnings on the Roth balance can be withdrawn tax-free during retirement, provided IRS regulations are followed.
According to a TSP memo:
When pre-tax money is converted from a traditional TSP balance, it is added to taxable income for the year. This means you will owe income tax on the converted amount based on your personal tax rate. It’s important to note that tax payments for the conversion must come from other resources, like a savings account. You can’t use part of the converted funds in your TSP to cover the tax.
Highlights of the new rule include:
- Conversion limits: Participants can request up to 26 conversions each year during the biweekly payment cycle.
- Eligibility: Active participants, those who have separated but still have accounts, and beneficiary participants (like spouses) are eligible to convert. Non-spouse beneficiaries and alternate payees cannot participate.
- Minimum requirement: A minimum balance of $500 must be maintained for each conversion as well as for each type of contribution.
- Tax handling: The conversion will create taxable income but won’t be subject to withholding tax, meaning taxes need to be paid from external funds.
FRTIB is also providing educational resources, including web content and interactive tools, to help explain the tax implications of Roth conversions. Additionally, they are developing a tax calculator to aid participants in understanding the financial impact of these conversions.
Addressing User Comments and Amendments to the Proposed Rule
Frequency of Conversions
Some commenters suggested that the rule should specify a maximum number of Roth conversions permitted each year, rather than leaving it up to the TSP recordkeeper. FRTIB has revised the rule accordingly, permitting participants to request up to 26 conversions per calendar year, aligning with biweekly payroll schedules. This means multiple conversions can occur in the same pay period.
Who Can Request a Conversion
Some users called for clarification on who is eligible to request a Roth in-plan conversion. FRTIB clarified that both participants and beneficial participants can make such requests, which includes:
- active participants
- those with separate TSP accounts
- surviving spouses with beneficiary accounts
However, non-spouse beneficiaries and alternate payees remain ineligible for this conversion.
Conversion of Tax-Free Balances
One comment suggested allowing the conversion of tax-exempt balances (like those from combat zone pay) in addition to pre-tax amounts. FRTIB confirmed that the term “traditional balance” includes both tax-exempt and pre-tax funds. However, it’s important to follow IRS proration rules, so any conversion must proportionally reflect pre-tax and non-taxable amounts based on the total balance.
Minimum Conversion Amount
Another commenter proposed removing the $500 minimum for Roth in-plan conversions to facilitate immediate or automatic conversions. FRTIB decided to keep this threshold, explaining that it helps avoid small transactions that would increase administrative costs and ensure effective record-keeping.
Minimum Balance Requirement
Several commenters voiced concerns over the necessity to maintain a $500 minimum for each type of contribution from which payroll deductions are made. FRTIB maintained this requirement, noting that it helps avoid negative balances and reduces potential payroll issues.
Automatic Conversion Tool Suggestion
Some users suggested implementing an automatic tool to convert traditional balances to Roth accounts once a certain threshold is reached. FRTIB dismissed this idea, emphasizing that the significant tax implications of Roth conversions require careful consideration by participants.
Tax Payment on Converted Amounts
Feedback suggested permitting withholding or clarifying a withholding rate for taxable amounts. However, FRTIB noted it could not accept these proposals since IRS guidelines indicate that withholding does not apply to in-plan Roth conversions of undistributable amounts. Consequently, participants must use funds from separate sources to meet their tax obligations.
Conclusion
This final rule marks a significant step ahead as in-plan Roth conversions will kick off within the TSP on January 28, 2026. Participants are encouraged to prepare for the associated tax implications and to utilize the new resources provided by TSP before making conversion decisions. Consulting a tax or financial advisor for guidance on whether to pursue a Roth conversion as part of a retirement savings strategy is also advisable.
