Major changes are coming to the Thrift Savings Plan (TSP) in January 2026 that will fundamentally alter how federal employees plan for retirement. As reported by FEDweek, the TSP is launching a long-awaited in-plan Roth conversion feature and implementing significant updates to catch-up contributions. These changes offer powerful new tools for tax diversification, but they come with strict rules and immediate tax consequences that demand a strategic approach.
🔄 The Game Changer: In-Plan Roth Conversions
Starting January 28, 2026, participants will have the option to convert their existing Traditional (pre-tax) TSP balances to Roth (after-tax) balances without leaving the plan. Previously, this maneuver required transferring funds out to a private IRA, often incurring higher fees. Now, you can execute this strategy within the low-cost environment of the TSP.
How It Works:
- Flexibility: You can convert a specific dollar amount or a percentage of your eligible funds.
- Frequency: You are limited to 26 conversions per year (once per pay period).
- The “Hold Back”: You must maintain a minimum balance of $500 in your Traditional account; you cannot convert every single penny.
- Eligibility: This is available to active employees, separated participants, and spousal beneficiaries.
⚠️ The Tax Reality Check: This is not a “free” move. When you convert Traditional funds to Roth, the entire converted amount is treated as taxable income for that year.
- Critical Rule: You generally cannot use TSP funds to pay the tax bill. You must pay the taxes from an outside source (like a savings account).
- The Risk: A large conversion could push you into a higher marginal tax bracket, increasing your Medicare premiums (IRMAA) and potentially reducing other tax credits.
📈 2026 Contribution Limits: Supercharging Your Savings
The IRS has also finalized the contribution limits for 2026, offering older employees a massive opportunity to catch up.
- Standard Limit: The elective deferral limit rises to $24,500.
- Standard Catch-Up (Age 50+): Increases to $8,000.
- “Super” Catch-Up (Ages 60-63): A new tier allows those aged 60 to 63 to contribute a catch-up of $11,250.
The “High Earner” Mandate: There is a catch for high earners. If your 2025 FICA wages (Box 3 of your W-2) exceeded $150,000, your catch-up contributions in 2026 must be made to the Roth TSP. You lose the tax deduction on those specific contributions, meaning you pay the tax now to get tax-free growth later.
📊 Sound Data: The Math of “Super” Savings
To understand the scale of this opportunity, consider a federal employee aged 61 who maximizes every available option in 2026.
- Standard Contribution: $24,500
- Super Catch-Up: $11,250
- Agency Match (5% of $150k salary): $7,500
Total Annual Addition: $43,250 This is a staggering amount of tax-advantaged space. For a high earner (over $150k), the $11,250 catch-up must be Roth, effectively forcing tax diversification. If you convert just $10,000 of your existing Traditional balance on top of this, you are aggressively shifting your future liability to the present—a move that makes mathematical sense only if your future tax rate will be higher than your current one.
🧭 Navigate the Tax Minefield with Experts
The ability to convert funds and contribute more is powerful, but it turns your TSP into a complex tax planning vehicle. A wrong move—like converting too much in a high-income year—can result in a tax bill that erodes the benefits of the strategy.
This is where Internal Benefit Advisors becomes your strategic partner. We help you look beyond the “option” to see the “outcome.”
How We Help You optimize 2026:
- Conversion Analysis: We calculate the “break-even” tax rate to determine if a Roth conversion makes mathematical sense for your specific bracket.
- Cash Flow Planning: We help you plan for the tax bill associated with conversions so you aren’t caught off guard at filing time.
- High-Earner Strategy: For those hitting the $150k wage threshold, we help structure your contributions to ensure you maximize the match while adhering to the new mandatory Roth rules.
The rules of the game have changed. Don’t play with an outdated playbook.
Contact Internal Benefit Advisors today for a 2026 TSP Strategy Review.
References
- FEDweek. “TSP Highlights Upcoming Roth Conversion Option, Change in ‘Catch-Up’ Investments.”
- Federal Retirement Thrift Investment Board (FRTIB). Bulletin 25-4: Launch of Roth In-Plan Conversion Feature.
- Internal Revenue Service (IRS). Notice 2025-XX: Cost-of-Living Adjustments for 2026.
- Internal Benefit Advisors. Retrieved from https://internalbenefitadvisors.com
A new TSP option brings opportunity and tax risk
This video is highly relevant as it discusses the specific tax risks and planning opportunities associated with the new TSP Roth conversion feature launching in 2026.
Federal News Network · 690 views
