Coming to TSP in 2026…In Plan Conversions! Should You Be Interested?
Bottom Line Up Front: For the first time in 2026, the federal government’s defined contribution retirement savings vehicle, Thrift Savings Plan (TSP), will offer participants the ability to execute “in-plan conversions.” Similar to widely-used IRA 🡪 Roth IRA “conversions”, 401(k) in-plan conversions shift pre-tax assets into 🡪 after-tax balances (aka, Roth-type balances). This is a nice upgrade to TSP’s suite of features, albeit more than 10 years after the IRS authorized plan administrators to make it available. Whether it’s optimal for you depends on a lot of things, some of which are unknowable – and some of which are more connected to your emotions than your calculator. Let’s dig in.
Note: This post is intended to highlight the fact that TSP will allow in-plan conversions beginning in 2026, but much of this discussion is relevant for folks who may also be considering a “conversion” of IRA assets into a Roth IRA account. Throughout this post, I use the term “pre-tax” interchangeably with “traditional”, the term “401(k)” interchangeably with “TSP”, and the terms “post-tax” or “after-tax” interchangeably with “Roth”.
Background/Overview: What, exactly, is an in-plan conversion?
Broadly speaking, the U.S. government incentivizes workers to save for retirement using one of two distinctly different tax advantages:
The original incentive is the “pre-tax” advantage, introduced via the Individual Retirement Arrangement (IRA) in 1974 and furthered by the pre-tax 401(k) in 1980. Simply put, a saver can elect to defer (or deduct) compensation and contribute it to a pre-tax account, avoiding current-year income tax on the contributed amount in return for accepting some restrictions on the account. The account grows (hopefully) over the years, and no taxes are due on this growth as it happens. (This is referred to as tax-deferred growth.) Income taxes are eventually collected when the account owner begins to take distributions from the account in accordance with IRS rules. (Distributed amounts are treated as ordinary income.)
The newer incentive type is “after-tax” retirement savings, introduced via the Taxpayer Relief Act of 1997 and named for the legislation’s champion, Senator William Roth. The new law created the Roth IRA. Later (2006), the after-tax 401(k) account became available in some private sector plans and, much later, TSP (2012). Simply put, an eligible participant can elect to contribute some earnings to this after-tax retirement savings vehicle, but there is no tax advantage in the year of contribution. The account grows (hopefully) over the years; no tax is due on these earnings as they occur, and no tax is due on distributions from the account. This is referred to as tax-free growth.
For a period of time, the only type of tax advantage available was pre-tax savings, so everyone saving for retirement had a pre-tax account. When the after-tax savings vehicles came about, some folks switched to saving in after-tax retirement savings accounts – leaving them with two account types. With some savers expressing a clear preference for after-tax, Roth-type accounts, U.S. tax rules evolved and presented savers with the option to convert some (or all) of their existing pre-tax, traditional balances over to their post-tax, Roth balances. The saver “pays for” this action when the converted amount is included in his or her taxable income for the year in which the conversion is made.
This option became widely available, without limitation related to how much a saver was earning, in the form of IRA-to-Roth-IRA conversions in 2010.
The conversion option became available inside 401(k) plans in 2014, and becomes available for TSP participants for the first time next year (2026).
Ok – our editor (my lovely wife) has requested a more concise explanation:
Summary: An in-plan conversion is the movement of pre-tax 401(k) assets over to an after-tax, Roth-type 401(k) balance. Any converted amount will be added to the saver’s taxable income in the year the conversion is made. It’s a tradeoff between paying taxes today and paying them later.
How Does a 401(k) In-Plan Conversion Work, Mechanically?
Before we consider whether an in-plan conversion is optimal for our own situation, we think it’s useful to talk through how this thing actually works. What are the rules?
First – TSP’s own press release (CLICK HERE) from 5 September 2025 advises participants that this feature will be available in January 2026, but the mechanics (i.e., the buttons on the website) are forthcoming. TSP also “strongly recommend(s) that you consult a tax advisor to start planning how it would affect your taxable income and estimate how much you may need to pay in taxes.” I agree with this advice.
When you execute an in-plan conversion, assets in a pre-tax account balance move into your after-tax (aka, Roth-type) account balance. The converted amount is considered ordinary income in the current tax year; IRS Form 1099-R will be generated (a copy is issued to you by the plan administrator, and of course a copy goes to the IRS).
For in-plan conversions, no federal or state income tax withholding may be applied - it’s not even an option, unlike conversions between IRAs. A participant who executes an in-plan conversion is responsible for paying any additional taxes owed, and paying them on schedule to avoid underpayment penalties. Note: the U.S. Treasury makes it suspiciously easy to make an additional “estimated” tax payment electronically – (CLICK HERE).
Because this is considered a “direct rollover”, the plan administrator is not required to apply a 20% withholding (because you, the participant, never took possession of the funds as they moved between, for example, two different plans).
Even if you are younger than 59 yrs 6 mos, no 10% early withdrawal penalty is applied.
For each conversion amount that moves from a participant’s pre-tax balance and into an after-tax (Roth) balance, a distinct 5-year vesting period applies. The start of the vesting period is 1 January of the calendar year in which the conversion is made. If you converted some assets over to your Roth 401(k) balance in August 2025, a 5-year vesting period begins on 1 January 2025 and ends on 1 January 2030. During the vesting period, you cannot make qualified distributions using that bit of money unless an exception applies (the exceptions are mostly unattractive circumstances). So? Don’t convert asset that you think you might want to distribute/spend in the next five years.
Table Stakes: In order to answer the question, “Should I consider an in-plan conversion?” – let’s talk through why anyone would (or would not) want to do so. As we consider each, just ask yourself whether the argument is relevant to your circumstances.
Arguments in favor of converting pre-tax savings 🡪 after-tax savings:
Today’s Income Tax Rates are Relatively Attractive (a Math Factor): Compared with historical norms, today’s tax exposure for most middle-class or upper middle-class families is favorable. Many tax and public policy experts warn that the U.S. sovereign debt load and budget outlook point to a likelihood of higher tax rates in the future. If income tax rates are indeed higher in the future than they are today, we might do better by paying tax now and enjoying a (more valuable) tax-free distribution in the future. To consider this issue for yourself, you need to consider both today’s marginal tax rate (known) and the future marginal tax rate (unknown). All else being equal:
If you earn a ton of money today and face a marginal rate of 35%, conversions become less attractive.
If you expect to earn a bunch of money during your 60’s and 70’s (pensioners, small business owners, etc), conversions become more attractive.
If you expect to have a very efficient tax profile in retirement, conversions are less attractive.
The Spousal Beneficiary (a Math Factor): It’s not a secret that our tax code is favorable for married folks who file jointly (MFJ), but it often sneaks up on folks who find themselves single late in life. How? Well, let’s just have a look at the federal marginal tax rates for folks with taxable income of about $90K:
When you’re Married Filing Jointly (MFJ), your marginal federal tax rate is 12% and you’ll pay that rate on each additional dollar earned until your taxable income exceeds $96,950 (2026). At that point, each additional dollar earned will face a marginal rate of 22%. But, then a spouse passes away:
Let’s just say, for argument’s sake, that taxable income for the surviving family member stays at about the same level, $90K. For our survivor, who is now Single (S), the marginal tax rate jumps from 12% to 22%, and it happens fast - when income exceeds $48,475!
For most widows or widowers, expenses go down a little bit (which may enable a survivor to also reduce taxable income), but probably not by half – as the federal brackets seem to imply. Alas – these are the rules. So? Dealing with the change in federal income tax profile is a bummer (along with losing your spouse), but it’s a lot easier to deal with when distributions from our retirement savings accounts are not taxable income.
Pay Me Now, or Pay Me (a lot) Later (a Math Factor): Unless you are a truly unfortunate investor, we expect to see your retirement savings grow over the next 10, 20, or 50 years. That’s great, but if your money is growing in a pre-tax account, your growth is tax deferred – meaning that you’re only kicking the tax can down the road. Along the way, you’re compounding a taxable asset…growing a nest egg for Uncle Sam. Conversely, any assets in an after-tax account will grow tax free. Why is this an important difference? In most long-term retirement savings stories, the vast majority of the account’s value when it comes time to distribute is earnings, and we don’t owe tax on earnings from a Roth-type account. If you move $50,000 from your pre-tax balance into your Roth balance today, you’ll pay taxes on $50,000. If you don’t, and it grows at 7% for 25 years, you’ll have an account worth more than $270,000…and it will all be taxed, eventually – at whatever your tax rate is at that time. To consider this issue for yourself, you need to factor your age, your expected investment performance, and the size of your account today. All else being equal:
The younger you are, the more attractive conversions become.
The better your expected investment performance, the more attractive conversions become.
If you’re young, with a large pre-tax account value, and you expect above average returns between now and distribution – conversions become very attractive indeed.
Flexibility and Control (a Math and Behavioral Factor): In the paragraph above, I likened the pre-tax retirement account to a surrogate womb – building a juicy, taxable asset for future politicians to squander on idiotic projects and special interests…or paying interest to service debt that financed past idiotic projects and special interests. (I digress.) Anyhow…when you’ve got a pre-tax retirement savings account, you haven’t paid taxes on the contributions and the earnings are growing tax deferred. And the government isn’t going to let this nice arrangement go on forever – they want their money! Thus, the RMD – or Required Minimum Distribution. When assets are inside a pre-tax retirement savings account, the owner is required to start taking distributions based on their age (the age varies based on birth year and changing legislation). For most folks, we can plan these involuntary distributions beginning in our early- to mid-70’s. (Note: When we’re talking about a 401(k), the rules do allow us to delay RMD’s if we’re still working at the company who sponsors the plan.) Why does this matter? Well, it can prove inconvenient for families with larger retirement savings accounts to be compelled to realize such-and-such taxable income at such-and-such age. It’s particularly inconvenient when you have other sources of wealth. To consider this issue for yourself, you need to fast-forward into your 70’s and 80’s. Will you be living off your 401(k) – meaning that you’ll be taking distributions anyhow? Or will you be in receipt of multiple pensions, investment income from brokerage accounts and real estate investments, and earnings from a small business that you still love to operate? If you’re the latter, RMDs are going to be a bittersweet, annual hassle for you (and your tax advisor).
Estate Planning (a Math and Behavioral Factor): Some folks are fortunate enough to use their retirement savings accounts as money that will be passed along to beneficiaries – usually adult children. If that’s the case, conversions are attractive – for a few reasons:
First, if you leave everything in the pre-tax accounts and live much past the start of RMDs, a significant amount of the account value is going to be forced out of the tax shelter (in the form of RMDs). You could take the distributions, pay the tax owed, and just pass the net amount to your heirs as part of an inter-vivos gifting strategy but, again, we’ve forever lost the benefit of a tax shelter because of the RMDs that apply to pre-tax accounts.
Second, whatever does pass to your beneficiaries will probably land in their lap during their peak earning years (and, probably when beneficiaries face the highest marginal tax rates of their lives). Note: the distribution rules applied to beneficiaries are harsher than the rules applied to the account owners, usually requiring full liquidation within 10 years.
If an account owner converts his or her retirement savings accounts over to Roth-type (after-tax), the owner does not have to take any distributions in his lifetime, extending the full benefit of the tax shelter. When he dies, the account can be used to fund after-tax Roth IRAs for adult children who, in turn, have the option to liquidate the account immediately (with no tax consequence) or leave those assets untouched and growing tax-free for another 10 years (at which point the account is liquidated – again, with no tax consequence).
The behavioral piece of this to consider: Do you care about the tax consequences faced by your beneficiaries when they receive a bunch of money that you had set aside for retirement? For most folks, the answer is nuanced - they’re not particularly worried about the kids owing taxes (they just inherited a bunch of money), but they are interested in achieving the full effect of the tax strategy’s purpose -preserving what they view to be a legacy gift to the next generation(s).
The Pain Factor (a Behavioral Factor): Everything I’ve written so far can be found reading any personal finance publication. This next bit, however, is based on numerous conversations with real folks working their way into or through the “distribution stage” of the financial lifecycle. (Generally, these folks have fully retired, have some retirement income from a pension and Social Security, and are distributing savings from their IRAs, Roth IRAs, and other retirement savings accounts.) Here’s what I’ve observed:
There is something different for folks when they sit down to take $50K out of their retirement savings account (e.g., a pre-tax 401(k)) and realize that they need to set aside $10 – 15K to pay taxes – and maybe more if that $50K is expected to result in increased Medicare premiums. It just feels different.
These are good Americans, mind you – and they generally understand that everyone needs to help pay the public expense…but trust me, there is real discomfort when they contemplate paying personal income tax in a year where they have no wages (W-2 earnings). At some point between when you enjoy a pre-tax advantage (in your 30’s, for example) and when you go to distribute and spend (in your 60’s, for example), you kindof forget that you ever got a tax benefit. Unfortunately, when you go to remind yourself, you get it…but you’re far from happy about it.
The point is - all else being equal – most retirees would tell their younger selves to pay the tax while they are still working!
Arguments against converting pre-tax savings 🡪 after-tax savings:
Obviously, I spent a lot of space (above) talking about “why you would” take advantage of the option to execute an in-plan conversion at a workplace retirement savings plan such as TSP. And, I don’t want to be lazy…but it’s pretty tempting to just say, “Hey, if the benefits of conversions don’t apply to your situation, you embody the other side of the argument and don’t need to worry about it.” But, for posterity’s sake – here’s a (much quicker) look at why in-plan conversion might not be the best move in your situation:
First – here’s a nod to the accountants – we’ve got to recognize that one of the CPA’s cardinal rules is: “A tax delayed is a tax not paid.” I work with (and respect) accountants who will tell you that accelerating your taxes (paying for conversions today) in favor of delaying your taxes (using pre-tax retirement savings vehicles and paying taxes upon distribution) is not The Way.
If you don’t expect a lot of taxable income during your retirement years (i.e., you’ll live modestly in your fully-paid home, using your Social Security benefit for income, etc)…then you are less incentivized to “convert”. I just don’t see significant changes to the tax profile for lower-income families living in retirement.
If you don’t have significant pre-tax balance in your account that will result in large, involuntary distributions (RMDs) when you’re in your 70’s and 80’s…then you are less incentivized to “convert”.
If you’re already in your late-60’s…then you’re less incentivized to “convert”. Simply put, there is just less time for the investment of conversions to “pay off”.
If you’re not too worried about passing along a bunch of your retirement savings money to your kids (because, for example, you’re estimating that most of it will be spent in your lifetime)…then you are less incentivized to “convert”.
If you believe your government is going to be able to spend or produce its way out of today’s debt load, enabling politicians to enact tax rates that are lower during your retirement years than they are today…then you are less incentivized to “convert”.
If you are a very high earner today (your federal marginal tax rate is 32% or higher)…then you are less incentivized to “convert” (until you find a way to offset some of that taxable income!).
Thanks, a lot, Egghead…But What Should I Do? Ok – as we note in our opening disclosure, this blog is designed to inform, entertain, and stimulate folks to feel more confident in their own decision-making, but we can’t give advice through a blog because we don’t have a detailed accounting of the recipient’s personal and financial circumstances. But…
Here’s the poster child for doing some in-plan conversions at TSP:
Jillie and Billie are in the military, have been married for 10 years, and have three kids (14, 9, and 7). Jillie and Billie are both 45 years old with total taxable income of about $150K / year and combined pre-tax TSP account balances of about $750K. They are Florida residents, but plan to retire and move to CO at age 60, at which point the family expects combined pension income of about $90K / year. Billie and Jillie are both saving 10% of their pay into TSP, but have budget flexibility to save more for retirement.
What makes in-plan conversions attractive for Jillie and Billie?
Age: This is a young family with plenty of time to see a conversion strategy “pay off.” If they don’t convert any of it, that $750K in pre-tax savings is going to grow into a tax bomb of $3-4M by the time they are 70…and that bomb will only become more problematic if they continue to contribute over the next 15 years.
Pensions: Jillie and Billie are going to have pension income in retirement – in addition to Social Security. It’s impossible to know what their future tax rates will be, but we think the family will probably be “forever trapped” in tomorrow’s version of today’s 22% rate.
Income and Current Tax Rates: Because a military family’s BAH (housing allowance) is an untaxed entitlement, Jillie and Billie don’t have a ton of taxable income even though take-home pay is well over $200K. With taxable income at $150K, their federal marginal rate is “only” 22%...that’s actually pretty low. And, if taxable income goes past $206,700 (2025), the rate is still “only” 24% and it stays there until income exceeds about $395K. This means we have plenty of “room” to execute conversions without facing the 32% federal rate.
Budget Flexibility: Jillie and Billie have the flexibility and willingness to save additional money for retirement. One thing they could do with this flexibility is execute some in-plan conversions. Simply direct TSP to convert $100K from Billie’s pre-tax TSP balance to his Roth balance, then write a check (about $20K) to the IRS. They won’t owe state tax on the conversion because they are FL residents (no state income tax), and they won’t owe state tax in retirement (even if they retire to CO) because the money is now in a tax free (after tax) account. Glorious.
The End: As with any financial tool – it’s nice that it exists…but that doesn’t mean we have to use it. In-plan conversions and/or IRA-to-Roth-IRA conversions are great options to have and I’m encouraged that our military and federal workforce will have this option for TSP in 2026. I hope we’ve described the aspects of this option in a useful way. Or – if we’ve at least confused you enough to be intrigued…I hope that you’ll bring your money to the table and get some ideas from people you trust. If you don’t trust anyone, get in touch with us and we’ll give you a hand.
Next month’s post: “Are Cars as Expensive as they Seem?” Your authors love the world of automobiles, and we especially love the discussions that occur when the American obsession with vehicles collides with personal finance. This post will be full of snarky observations and opinions rather than retirement savings strategies…but the latter is always lurking.
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