Before You Convert: Four Questions Every Military Family Should Ask

1. What will this do to my taxes this year?

• A conversion increases your taxable income.
• That could:
  • Push you into a higher tax bracket
  • Affect eligibility for certain benefits
  • Trigger estimated tax payments
• You must pay the tax bill out of pocket—you cannot use TSP funds to cover it.

2. Will my tax rate be higher or lower in the future?

• This is the heart of the decision.
• A conversion may make sense if:
  • You’re in a low tax bracket now
  • You expect higher income in retirement (pension + Social Security + withdrawals)
  • You want to reduce future required minimum distributions (RMDs)
• It may not make sense if:
  • You’re currently in a high tax bracket
  • You expect a lower income in retirement
  • You can already contribute directly to Roth TSP through payroll

3. How will this affect my retirement income strategy?

• Military retirees often have multiple income streams:
  • Military pension
  • VA disability
  • Social Security
  • TSP withdrawals
• If you expect your taxable income to be high in retirement, having tax-free Roth money can give you flexibility and help you avoid higher Medicare premiums (IRMAA) and Required Minimum Distributions (RMD).

4. What are my long-term goals for my family?

• A Roth balance can be a powerful legacy tool:
  • Beneficiaries can receive tax-free withdrawals
  • You avoid passing on a tax burden
  • Charitable gifts from Roth funds are tax-efficient
• If your heirs will be in a lower tax bracket than you are today, converting now may cost more than letting them inherit traditional funds.

The Five-Year Rules You Can’t Ignore

• Two separate IRS clocks start ticking when you convert:
  • Five-year rule for Roth earnings
    • Earnings become tax-free only if:
      • Five years have passed since your first Roth contribution or conversion
      • AND you’re age 59½, disabled, or deceased
  • Five-year rule for converted amounts
    • If you withdraw converted funds within five years and you’re under 59½, you may owe a 10% penalty.
    • For military families who move, deploy, and transition frequently, these timelines matter.

So… Should You Convert?

• There’s no one-size-fits-all answer.
• Here’s a simple way to think about it:
  • A Roth in-plan conversion may be a good fit if you:
    • Are in a low tax bracket this year
    • Have cash available to pay the tax bill
    • Expect higher income in retirement
    • Want to reduce future RMDs
    • Want to leave tax-free money to your family
  • It may not be the right move if you:
    • Are currently in a high tax bracket
    • Can already contribute to Roth TSP through payroll
    • Don’t have cash to pay the taxes
    • Expect lower income in retirement
    • Will need the converted money within five years

Final Thoughts for Military Families

Military life brings unique financial opportunities—and unique challenges. A Roth in‑plan conversion can be a powerful tool, but only when used intentionally and with a clear understanding of the tax implications.

If you’re considering a conversion:

• Run the numbers
• Think about your long-term goals
• Consider your retirement income sources
• Talk with a tax professional

A well‑timed conversion can save thousands in taxes over your lifetime—but a poorly timed one can create an unnecessary tax bill. There’s a lot to figure out when it comes to in-plan conversions, so make sure you are fully informed to make the right decision for your situation!

Did you miss out on the first part of our Roth In-Plan Conversions mini-series? Then, make sure to check it out!

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Think of this as moving from understanding the basics to learning how to use the TSP more strategically. A lot of service members don’t realize this option even exists, but when used at the right time, it can shape both your tax bill today and your financial flexibility in retirement. My goal here is to walk you through it in the same clear, practical way we approached the basics without jargon, just the information you need to make a confident decision.

Let’s break it down together.

What Is a Roth in‑Plan Conversion?

A Roth in‑plan conversion moves money from your traditional (pre-tax) TSP balance into your Roth (after-tax) balance. You’re not withdrawing anything, you’re just shifting it inside your account. The trade-off is straightforward: you pay taxes now so you can enjoy tax-free withdrawals later, as long as IRS rules are met.

Think of it as choosing when you want to pay the tax bill now or later, in retirement.

A Quick TSP Refresher:

• Traditional TSP gives you a tax break today. You don’t pay taxes on the money you contribute, but you will pay taxes on both the contributions and the growth when you withdraw it in retirement.
• Roth TSP works the opposite way. You pay taxes on the contribution now, but both your contributions and the growth come is withdrawn tax-free in retirement if you follow the rules.

A Roth in‑plan conversion takes money you originally contributed as Traditional and treats it as if you had contributed it as Roth all along, meaning you settle the tax bill today in exchange for tax-free income later.

Who Can Convert?

Almost everyone with a TSP can do a Roth in‑plan conversion, including:

• Active‑duty service members
• Federal civilians
• Retirees
• Spouse beneficiaries
• Non-spouse beneficiaries are the ONLY group excluded.

The minimum conversion amount is $500, and you can do up to 26 conversions per year.

Special Note for Service Members with Combat‑Zone Contributions

If you’ve contributed tax-exempt money while deployed, a portion of your conversion will also be tax-exempt. However, the IRS requires conversions to be proportional, so you can’t choose to convert only the tax-free portion.

This means:

• If your tax-exempt balance is small, most of your conversion will still be taxable.
• If your tax-exempt balance is large, more of your conversion will be tax-free.

This is one area where military members have a unique advantage, but only if the math works in your favor.

Don’t forget to check out part two of this Roth In-Plan Conversions mini-series!

Find Out More with My Military Savings and Finances!

What IS the Thrift Savings Plan?

• The Thrift Savings Plan (TSP) is the federal government’s version of a 401(k), a retirement savings account that allows you to invest money in now, so it grows over time.
• For service members in the Blended Retirement System, the TSP is an integral part of your retirement package, complete with automatic contributions and potential matching from the Department of Defense.

Why the TSP Matters for Military Members

• Retirement investing can be confusing. The TSP is designed to simplify planning, offering low fees, simple investment options, and the flexibility to continue contributing whether you’re stateside, deployed, or transitioning out of the service.
• Since your career path may include PCS moves, breaks in service, or early separation, the TSP gives you a portable, long‑term financial foundation that stays with you no matter where the military sends you.

How does the TSP work?

• Think of it as a partnership between you and your future self.
• You choose how much to contribute from your paycheck, and that money goes into your TSP account.
• If you’re in the Blended Retirement System, the DoD also contributes automatically and may match part of what you put in.
• Over time, your contributions and investment growth compound, meaning your money earns money.

What are my contribution options (Traditional vs. Roth)?

• The TSP offers tax-advantaged savings in two ways:
  • Traditional TSP: You don’t pay taxes on the money now, the money grows tax-deferred, and you pay taxes on the amount contributed and the growth when you withdraw it in retirement.
  • Roth TSP: You pay taxes on the contribution amount now, and the investment grows tax-free. Withdrawals in retirement are tax‑free if you follow the rules.
• Both options can be smart—it just depends on your situation and goals.

What are the TSP investment funds?

• The TSP keeps things simple.
• Instead of hundreds of choices, you get a small menu of funds that represent different parts of the market.
• These include the G, F, C, S, and I Funds, plus the Lifecycle (L) Funds that mix them automatically based on your target retirement date.

What does each TSP fund invest in?

• Here’s a quick overview of the different fund options, what each invests in, the level of risk, and how the funds have performed over the past decade:
• Each fund represents a different “slice” of the market and mixing them helps balance risk and reward.

How do the Lifecycle (L) Funds work?

• L Funds are “set it and forget it” options.
• You pick the fund closest to the year you expect to retire, and it automatically adjusts your mix of investments over time—more growth when you’re younger, more stability as you get closer to retirement.

How do I choose the right TSP fund for my goals?

• Start with two questions:
  • How long until I need this money?
  • How comfortable am I with ups and downs in the market?
• Longer timelines usually allow for more growth‑focused funds (C, S, I).
• Shorter timelines or lower risk tolerance lean toward more conservative options (G, F).
• L Funds are a great middle ground if you want simplicity.

How much should I contribute to my TSP?

• A good starting point is enough to get the full DoD match if you’re in the Blended Retirement System.
• From there, increasing your contribution by even 1% each year can make a huge difference over time.
• Investing early in your career enables greater growth opportunities.
• The key is consistency.

What happens to my TSP if I PCS, deploy, or leave the military?

• Your TSP stays with you.
• You can keep contributing while deployed, and if you separate or retire, the account remains yours.
• You can leave it where it is, roll it into another retirement account, or start withdrawing in retirement, typically age 59 1/2.

How do I check or change my TSP allocations?

• You can log into your TSP account online and adjust your contributions or investment choices anytime.
• It’s quick, and even small changes can help you stay aligned with your goals.

What mistakes should I avoid?

• A few common ones:
  • Not investing at all.
  • Leaving money on the table by not contributing enough to receive the government match.
  • Putting everything in the G Fund because it “feels safe.”
  • Forgetting to update contributions after a PCS or promotion.
  • Trying to time the market.
• Slow, steady, and consistent usually wins.

How can the TSP help me build long‑term wealth?

• The combination of low fees, matching contributions, and decades of compound growth makes the TSP a powerful engine for your financial future.
• Even modest contributions can grow significantly over a military career.

Where can I learn more or get help?

• The TSP website is the go-to source for TSP information.
• Your installation’s financial readiness office and Military OneSource are excellent sources for personalized TSP assistance.
• The more you understand, the more confident you’ll feel about the choices you’re making.

Find Out More with My Military Savings and Finances!