Thrift Savings Plan Launches Roth In-Plan Conversion
What happened
The U.S. federal government's Thrift Savings Plan (TSP) has launched a new feature allowing participants to make in-plan conversions of their traditional balances to a Roth account. The change provides new opportunities for retirement-focused fintechs and advisory platforms to offer automated tax optimization and conversion analytics to federal employees and other TSP participants.
Why it matters
- The amount converted from a traditional TSP balance to a Roth balance is added to the participant's taxable income for that year. This could potentially push the individual into a higher marginal tax bracket. - Taxes owed on the conversion must be paid with funds from an outside source, like a savings account; money cannot be withheld from the converted amount to cover the tax liability. - Participants are permitted to make up to 26 in-plan conversions per calendar year. If an individual holds both a civilian and a uniformed services TSP account, this limit applies to each account separately. - The Roth TSP option was first authorized by the Thrift Savings Plan Enhancement Act of 2009 and became available to participants in May 2012. - A five-year rule applies to converted amounts; if money is withdrawn within five years from January 1st of the conversion year, a 10% early withdrawal penalty may apply unless the participant is 59½ or older or another exception applies. - Before this feature, the primary way to convert traditional TSP funds to a Roth account was a multi-step process involving transferring the funds to a traditional IRA and then converting that IRA to a Roth IRA. - Funds invested in the TSP's mutual fund window are not eligible for direct conversion; they must first be sold and transferred into one of the core TSP funds before they can be converted to Roth. - Participants who are required to take minimum distributions (RMDs) must satisfy their annual RMD before they are eligible to perform a Roth in-plan conversion for that year.
Key numbers
- Participants are permitted to make up to 26 in-plan conversions per calendar year.
- The Roth TSP option was first authorized by the Thrift Savings Plan Enhancement Act of 2009 and became available to participants in May 2012.
- A five-year rule applies to converted amounts; if money is withdrawn within five years from January 1st of the conversion year, a 10% early withdrawal penalty may apply unless the participant is 59½ or older or another exception applies.
What happens next
- This could potentially push the individual into a higher marginal tax bracket.
- Participants are permitted to make up to 26 in-plan conversions per calendar year.
- The Roth TSP option was first authorized by the Thrift Savings Plan Enhancement Act of 2009 and became available to participants in May 2012.
Quick answers
What happened in Thrift Savings Plan Launches Roth In-Plan Conversion?
The U.S. federal government's Thrift Savings Plan (TSP) has launched a new feature allowing participants to make in-plan conversions of their traditional balances to a Roth account. The change provides new opportunities for retirement-focused fintechs and advisory platforms to offer automated tax optimization and conversion analytics to federal employees and other TSP participants.
Why does Thrift Savings Plan Launches Roth In-Plan Conversion matter?
The amount converted from a traditional TSP balance to a Roth balance is added to the participant's taxable income for that year. This could potentially push the individual into a higher marginal tax bracket. Taxes owed on the conversion must be paid with funds from an outside source, like a savings account; money cannot be withheld from the converted amount to cover the tax liability. Participants are permitted to make up to 26 in-plan conversions per calendar year. If an individual holds both a civilian and a uniformed services TSP account, this limit applies to each account separately. The Roth TSP option was first authorized by the Thrift Savings Plan Enhancement Act of 2009 and became available to participants in May 2012. A five-year rule applies to converted amounts; if money is withdrawn within five years from January 1st of the conversion year, a 10% early withdrawal penalty may apply unless the participant is 59½ or older or another exception applies. Before this feature, the primary way to convert traditional TSP funds to a Roth account was a multi-step process involving transferring the funds to a traditional IRA and then converting that IRA to a Roth IRA. Funds invested in the TSP's mutual fund window are not eligible for direct conversion; they must first be sold and transferred into one of the core TSP funds before they can be converted to Roth. Participants who are required to take minimum distributions (RMDs) must satisfy their annual RMD before they are eligible to perform a Roth in-plan conversion for that year.
