The financial picture for federal employees has brightened significantly following a record-breaking year for the Thrift Savings Plan (TSP). As reported by FEDweek, the average TSP account balance surged by roughly $20,000 in 2025, fueled by a global market rally that lifted portfolios across the board.
But the good news extends beyond the bottom line. As of late January 2026, the TSP has officially launched a long-awaited feature: the In-Plan Roth Conversion. This new capability gives participants unprecedented control over their future tax liability, but it comes with a warning label that every federal employee needs to understand.
📈 The Numbers: A Wealth Wave for FERS and CSRS
The 2025 market performance delivered tangible growth for federal retirement nest eggs. According to the latest data presented to the TSP governing board:
- FERS Participants: The average account balance climbed from $194,000 to $217,300—an increase of $23,300.
- CSRS Participants: The average balance rose from $220,000 to $240,700—an increase of $20,700.
- Total Assets: The plan now manages a staggering $1.07 trillion, up from $963 billion a year prior.
Sound Data: What Drove the Surge? While consistent contributions played a role, 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, a 24% increase year-over-year.
- 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, a strategy that could endanger long-term security.
🔄 The New Power Tool: In-Plan Roth Conversions
For years, moving Traditional (pre-tax) TSP money into a Roth (after-tax) bucket required transferring funds out of the TSP to an external IRA. That friction is now gone.
You can now 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, preventing them from facing a massive tax bill during probate.
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 to help you run the numbers, but a generic tool cannot 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 cannot 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 $145,000 (adjusted for inflation), the new “Secure 2.0” rules mandate that your catch-up contributions must be Roth. 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 through 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
