The U.S. stock market continued its impressive run in 2025, logging substantial gains for the third year in a row. Specifically, U.S. stocks rose by 17% based on price-to-earnings ratios. This follows increases of 23% in 2024 and 24% in 2023.
Noteworthy milestones include:
- The S&P 500 nearing 7,000.
- The Dow Jones Industrial Average surpassing $48,000.
While these trends are encouraging for Thrift Savings Plan (TSP) participants, they also point to necessary tax actions that some federal employees and retirees might need to consider in 2026.
TSP RMD Increases in 2026
For those retired from federal service and aged 73 or older, 2026 might bring about larger required minimum distributions (RMDs) from TSP accounts, particularly for participants invested mostly in the “C,” “S,” and “I” equity funds. The RMD for 2026 is determined entirely by the value of the traditional TSP account as of the end of 2025, so a record stock index at that time will lead to higher RMDs. This growth also means increased federal and state income tax liabilities for traditional TSP participants.
However, there are two potential upsides to the increased RMDs in 2026:
- The individual federal income tax rates have been low for the past eight years due to the Tax Cuts and Jobs Act of 2017, which was set to expire at the end of 2025. The recent passage of the One Big Beautiful Bill Act of 2025 extends these low rates for at least another five years.
- A larger RMD in 2026 could lead to more traditional TSP funds being withdrawn during that year, potentially resulting in lower TSP balances down the line and thus lower future RMDs.
Three Actions for Traditional TSP Participants
Traditional TSP participants might want to consider a few strategies to decrease future RMD amounts:
- Convert part of the traditional TSP account into a Roth TSP account.
- Rollover a traditional TSP directly into a traditional IRA.
- Roll over the traditional TSP into a traditional IRA and then make a qualified charitable distribution (QCD) from the IRA.
Converting to Roth TSP
Beginning on January 28, 2026, TSP participants can convert their traditional TSP accounts to Roth TSP accounts. This option is available to both employees and retirees. The goal behind such a conversion is to lower the current balance in the traditional TSP, potentially reducing future RMDs. Starting January 1, 2024, RMDs will be computed solely based on the traditional TSP balance at the end of the prior year.
Questions to Consider for Roth In-Plan Conversion:
Before proceeding with a Roth conversion, TSP participants should think about how the conversion will impact their current federal and state tax situation. It’s advisable to look into:
- How the conversion will affect taxable income.
- The federal and state income tax owed on converted amounts.
- Whether this will push the federal marginal tax rate higher.
- If there’s enough cash available to cover taxes from the conversion.
Considering the complexity surrounding tax implications, consulting a tax professional before making a conversion is highly recommended.
Direct Rollover from Traditional TSP to Traditional IRA
Federal employees retiring at age 55 or older may roll over part of their traditional TSP into a traditional IRA. Those aged 59.5 and above can also transfer funds in a similar manner. This rollover reduces the traditional TSP balance and can beneficially impact future RMDs.
It’s essential for traditional IRA owners to assess how these conversions will affect their tax situation, as they are fully taxable.
Benefits of Qualified Charitable Distributions
TSP participants inclined towards philanthropy should contemplate utilizing QCDs to lessen their traditional TSP balance. Those over 70.5 years can make QCDs up to $111,000 in 2026. A QCD must be a direct transfer from a traditional IRA to a qualified charity. To maximize benefits, TSP participants must first roll over funds from their TSP into a traditional IRA before making a QCD.
For participants aged 73 or older who also hold a traditional IRA, they could create additional QCDs for their traditional IRA as well. It’s worth noting that QCD amounts equal to or exceeding the traditional IRA RMD would fulfill the RMD without incurring tax consequences.
