TSP Updates: Roth Conversions and Negative Cash Flow

As 2026 approaches, the Thrift Savings Plan (TSP) is preparing to introduce in-plan Roth conversions, a significant enhancement to retirement planning. Meanwhile, recent data signals shifting participant behavior. Now is an ideal time for federal employees and retirees to reassess their TSP strategy in light of these developments.

In-Plan Roth Conversions Coming January 2026

Beginning January 28, 2026, participants will have access to in-plan Roth conversions, allowing them to transfer funds from their traditional (pre-tax) TSP balances into Roth (after-tax) TSP accounts without leaving the plan. Once converted, those funds will grow tax-free and, when withdrawn under qualifying conditions, may be distributed tax-free in retirement.

Key parameters include:

• Each conversion must be at least $500.
• Up to 26 conversion transactions per account per year will be permitted.
• Taxes owed on the converted amount must be paid from non-TSP funds.
• Participants subject to required minimum distributions (RMDs) must satisfy their RMD requirements before converting.
  

This feature offers greater flexibility in managing future tax liability and can be particularly beneficial for individuals expecting higher tax exposure later in retirement. However, because conversion amounts are treated as taxable income in the year of conversion, careful tax planning is essential.

TSP Cash Flow Turns Negative

At the same time, the TSP has experienced a shift in overall cash flow, with withdrawals, loans, and hardship distributions exceeding new contributions and loan repayments. While this likely reflects the increasing number of participants transitioning into retirement and accessing their accounts, it highlights the importance of active retirement planning rather than passive accumulation.

Considerations Moving Forward

For employees still in the accumulation phase, now may be the time to evaluate whether incorporating Roth conversion strategies aligns with long-term goals. Those nearing or in retirement should review withdrawal strategies and assess the sustainability of their income plan, particularly when balancing traditional and Roth balances.

The introduction of in-plan Roth conversions presents a meaningful opportunity, but also underscores the need for proactive tax and retirement planning. Speaking with a Federal Retirement Consultant (FRC®) could help you avoid unintended consequences.