The financial picture for federal employees just got significantly brighter. As reported by FEDweek, the average Thrift Savings Plan (TSP) account balance surged by roughly $20,000 in 2025, driven by a record-breaking year for global markets.
But the good news doesn’t stop at the bottom line. As of January 28, 2026, the TSP has officially launched a long-awaited feature: the In-Plan Roth Conversion. This new tool gives you unprecedented control over your future tax liability, but it comes with a warning label that every participant needs to understand.
📈 The Numbers: A Wealth Wave for FERS and CSRS
The 2025 market rally lifted boats across the board. According to the latest data presented to the TSP governing board:
- FERS Participants: The average account balance jumped from $194,000 to $217,300 (a $23,300 increase).
- CSRS Participants: The average balance rose from $220,000 to $240,700 (a $20,700 increase).
- Total Assets: The plan now manages a staggering $1.07 trillion, up from $963 billion a year ago.
Sound Data: What Drove the Surge? While consistent contributions helped, the heavy lifting was done by the I Fund (International), which posted a massive 32.45% return in 2025.
- The “Millionaire” Effect: This surge helped propel the number of TSP millionaires to nearly 200,000.
- The Participation Gap: Despite the benefits, data shows a “net outflow” of $19 billion in 2025—meaning more money left the plan (via withdrawals and loans) than came in. This suggests many participants are cashing out their gains rather than letting them compound.
🔄 The New Power Tool: In-Plan Roth Conversions
For years, if you wanted to move Traditional (pre-tax) TSP money into a Roth (after-tax) bucket, you had to transfer it out of the TSP to an IRA. That friction is gone.
As of this week, you can convert existing Traditional funds to Roth inside the TSP.
Why Do This?
- Tax-Free Growth: Once converted, qualified earnings grow tax-free forever.
- RMD Protection: Roth TSP balances are exempt from Required Minimum Distributions (RMDs), meaning the IRS can’t force you to withdraw money (and pay taxes on it) in your 70s.
- Legacy Planning: You can leave a tax-free inheritance to your heirs.
The Catch: Conversion is a taxable event. If you convert $50,000 from Traditional to Roth, you add $50,000 to your taxable income for this year.
- The Risk: A large conversion could push you into a higher tax bracket, trigger IRMAA surcharges on your Medicare premiums, or phase you out of certain tax credits.
🛡️ Strategy: Don’t Convert Without a Calculator
The TSP has released a new calculator on their website to help you run the numbers, but a generic calculator can’t see your full financial picture. The decision to convert shouldn’t be based on a “hunch” about future taxes—it requires a mathematical strategy.
Internal Benefit Advisors helps you use this new tool without accidentally detonating a tax bomb.
How We Optimize Your Conversion Strategy:
- “Bracket Filling”: We help you determine exactly how much you can convert to “fill up” your current tax bracket without spilling over into a higher rate (e.g., converting just enough to stay in the 22% bracket).
- Cash Flow Check: You must pay the taxes on the conversion outside of the TSP (you can’t use the converted funds to pay the tax bill). We ensure you have the liquidity to cover the IRS bill in April.
- High-Earner Compliance: If you earned over $150,000 in 2025, the new “Secure 2.0” rules mandate that your catch-up contributions must be Roth in 2026. We help you integrate this mandatory change with your voluntary conversion strategy.
The markets gave you a $20,000 raise. Don’t give it all back to the IRS in poor tax planning.
Contact Internal Benefit Advisors today for a Roth conversion analysis and tax strategy review.
References
- FEDweek. “Average TSP Account Up about $20,000 in 2025; Roth Conversion Option Launching.” January 27, 2026.
- Thrift Savings Plan (TSP). Roth In-Plan Conversions Guide & Calculator.
- Federal Retirement Thrift Investment Board (FRTIB). January 2026 Board Meeting Minutes.
- Internal Benefit Advisors. Retrieved from https://internalbenefitadvisors.com
