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Converting TSP to Roth IRA

The Roth TSP (Thrift Savings Plan) became available to federal government employees in 2012 and as a result provided federal employees the potential to receive tax-free income in retirement.  Withdrawals from Roth accounts, such as the Roth TSP are tax-free when the account owner reaches the age of 59½ and after a Roth account has been opened for 5 (five) years.  The possibility of receiving tax-free income in retirement has some federal employees and retirees asking is it a good idea to convert the TSP to a Roth IRA.

Once it was available, federal government employees were able to designate their contributions between the Traditional TSP and the Roth TSP.  While Traditional TSP contributions are made on a pre-tax basis, Roth TSP contributions are made on an after-tax basis.  In both instances, earnings while the funds are in the Traditional TSP and Roth TSP are not taxed, but the treatment of the withdrawals is different. 

Once a federal employee retires, (s)he has the option of leaving the funds in the TSP, purchasing a TSP annuity, or rolling over (transferring) a portion or the full amount of their TSP account.

Traditional TSP withdrawals are tax-deferred, meaning that taxes are paid once withdrawals take place, but once the 59½ age is reached AND the account has been opened for 5 years, Roth TSP withdrawals are tax-free.


The owner of a Traditional IRA enjoys the same tax-deferred status as someone whose funds remain in the (traditional) Thrift Savings Plan.  The owner of an IRA can convert their IRA to a Roth IRA by paying taxes on the converted amount and after five (5) years AND reaching age 59½, all withdrawals would be tax-free.


An IRA owner can convert any dollar amount or any percentage amount of an existing IRA to a Roth IRA. 


However, a federal employee (or retiree) cannot directly convert their TSP to the Roth TSP while funds remain in the TSP.  A federal employee or retiree can request a transfer directly from the TSP to a Roth IRA for a full or partial amount.  This action of converting the TSP to a Roth IRA creates a taxable event.


A federal employee or retiree may also (1) transfer a portion or all of their TSP to an IRA and then (2) the IRA can be converted to a Roth IRA.  The transfer out of the TSP to an IRA is a non-taxable event, but the conversion from a traditional IRA to the Roth IRA is a taxable event.  The converted amount would be added to your other income and you’d be taxed on the total income in the year the conversion took place.

You should be aware that the tax cuts enacted in 2018 made the cuts for corporations permanent, but the tax cuts for individuals are not; they are set to expire by 2027.  The table below compares the tax rates for single filers and joint married filers from 2017 to 2019. 

These lower tax rates may make it more attractive for federal retirees to consider converting their existing TSP account or IRA to a Roth IRA, because all things being equal, the tax consequences of doing so now are lower than they were previously.

While the Jones Wealth Management Group doesn’t provide tax advice and advises you to consult with your tax professional as it pertains to your individual situation, a competent financial advisor still should be aware of some basic tax rules and how the potential impact those rules have on recommendations to their clients.

A Chartered Federal Employee Benefits Consultant is a financial planning professional who has been specially trained on the complexities associated with the retirement and other benefits offered to the employees of the federal government.  To learn more about whether taking out money from the TSP early is in your best interest, please contact Jones Wealth Management Group at 901-312-9166 or click here and schedule a no-cost, phone or in-person consultation.  As always the final decision is always the client’s.  This information should not be used as a basis for tax advice. In any specific case, the parties involved should seek the guidance and advice of their own tax counsel.

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