Is Rolling TSP into Roth IRA Worth It? Understand the Tax Implications

Is your nest egg truly optimized, or is it quietly eroding under future tax burdens? Many federal employees and service members grapple with the pivotal question: is rolling TSP into Roth IRA worth it. With rising tax rates and the allure of tax-free growth, the choice can feel both urgent and opaque. Imagine gaining greater control, no required distributions, and a legacy shielded from taxation. But there’s a catch, understanding the tax implications is non-negotiable. Discover the strategy that could transform your retirement trajectory.

Below, we break down what you need to know to decide if rolling your TSP into a Roth IRA is truly worth it.

1. Understand the Basics: What is a TSP and Roth IRA?

The Thrift Savings Plan (TSP) is a retirement savings plan for federal employees and members of the uniformed services. It’s similar to a 401(k). There are two types of TSP accounts:

• Traditional TSP: Contributions are made pre-tax; taxes are paid when you withdraw.
• Roth TSP: Contributions are made after-tax; qualified withdrawals are tax-free.

A Roth IRA is a personal retirement account funded with after-tax dollars. Once in a Roth IRA, your money grows tax-free, and qualified withdrawals are also tax-free.

2. Why Consider Rolling a TSP into a Roth IRA?

Here’s why some people consider making the switch:

• More Control Over Investments: Roth IRAs usually offer a wider variety of investment options than the TSP.
• No Required Minimum Distributions (RMDs): Roth IRAs don’t require you to take distributions at age 73 (unlike Traditional TSPs).
• Tax-Free Growth: Once your money is in a Roth IRA and meets the five-year rule, all qualified withdrawals are tax-free.
• Better for Estate Planning: Roth IRAs can help pass wealth to heirs without triggering income taxes.

3. The Catch: Taxes on the Rollover

This is where it gets complicated.

If you’re rolling over funds from a Traditional TSP to a Roth IRA, you’ll owe income taxes on the full amount you move. That’s because Traditional TSP funds are pre-tax, and Roth IRAs are post-tax. The IRS treats the rollover like taxable income. Let’s say you roll over $100,000 from your Traditional TSP. That $100,000 will be added to your taxable income for the year, which could push you into a higher tax bracket.

This could also impact:

• Your eligibility for certain tax credits
• Your Medicare premiums (due to income-based surcharges)
• Your exposure to other taxes, such as the Net Investment Income Tax (NIIT)

If you don’t plan carefully, the tax hit can be severe.

4. When Does It Make Sense to Roll Over?

There are some situations where the benefits outweigh the tax cost. Ask yourself:

• Are you in a low tax bracket now? If you’re retired or taking a break from work, your income might be low. That means the tax bill for a Roth conversion could be smaller.
• Do you expect to be in a higher tax bracket later? Paying taxes now could save you money in the future if tax rates rise or your income increases later in retirement.
• Do you want to avoid RMDs?  Traditional TSP accounts require withdrawals starting at age 73. Roth IRAs don’t, so your money can keep growing tax-free.
• Are you planning to leave money to heirs? Roth IRAs can help your beneficiaries avoid income taxes on inherited retirement funds.

5. How to Manage the Tax Hit

There are ways to make the tax impact more manageable:

• Convert in Small Amounts Over Time: Instead of converting everything in one year, spread it out over several years. This strategy—called a staggered conversion—keeps you in a lower tax bracket.
• Pay Taxes from Other Sources: Don’t use your retirement money to pay the tax bill. If you do, you’ll owe taxes and possibly penalties on the amount used to pay taxes. Use savings or other funds instead.
• Time the Conversion Wisely: Do your conversion in a year when your income is unusually low—after retirement, during a career break, or before taking Social Security or pension benefits.

6. Roth TSP to Roth IRA: An Easier Transition

If you have a Roth TSP, rolling it into a Roth IRA is much simpler. In most cases, it’s not taxable if:

• You’re over age 59½, and
• You’ve had the Roth TSP account for at least five years

This type of rollover keeps your money growing tax-free and avoids future RMDs.

Be aware: the five-year rule applies separately to the Roth IRA. If it’s a new Roth IRA, you may need to wait to withdraw earnings tax-free—even if the Roth TSP met the five-year requirement.

7. Key Questions to Ask Before Rolling Over

To decide whether rolling your TSP into a Roth IRA is worth it, ask:

• Can I afford the taxes on the conversion?
• Am I in a low enough tax bracket to make it worthwhile?
• Do I need RMD flexibility?
• Am I using this money for retirement income or legacy planning?
• Do I have time to let the Roth IRA grow before needing the funds?

Is Rolling TSP into Roth IRA Worth It?

The answer isn’t the same for everyone. Rolling your TSP into a Roth IRA can be worth it, but only if the long-term benefits outweigh the short-term tax costs. It makes the most sense for people in low tax years, those planning for the future, or those focused on estate planning.

Take your time. Review your tax situation. Consult a tax advisor or financial planner before making a move. Making a smart, informed decision now could mean significant tax savings, and greater financial flexibility, for decades to come.