Some Important Questions for Traditional TSP Participants to Consider Before Performing Roth TSP In-Plan Conversions

Five-year rule for Roth TSP accrued earnings

The first five-year rule only applies to the accrued earnings in the participant’s Roth TSP balance and determines whether the  participant can withdraw those earnings federal and state income tax-free. Accrued earnings refer to income (interest, dividends, capital gains) that has accrued over time from the participant’s  TSP investments. Therefore, earnings on Roth TSP contributions that are included as part of Roth TSP in-plan conversions. Roth earnings are not taxed if the distribution is “qualified.” Roth TSP earnings become “qualified” and can be withdrawn tax-free when they meet both of these IRS requirements:

• 5 years have passed since January 1 of the calendar year in which the participant  made his or her first Roth TSP contribution (or, if the participant has never contributed to the Roth TSP, the participant’s first Roth TSP in-plan conversion when the participant’s first conversion creates the participant’s Roth TSP balance). Note that Roth TSP has been available to federal employees since 2012.
• The participant has  reached age 59.5, has a permanent disability, or is deceased.

If earnings do not meet both requirements, then they are not qualified, and the participant will pay income tax when the participant withdraws them. The following examples illustrate:

Example 1. Marie made her first Roth TSP contribution on  July 27, 2019. For the purpose of the 5-year Roth TSP participation rule, Marie’s five-year period started on January 1,2019 and ends December 31, 2023. Marie is currently 60 and intends  to perform her first Roth TSP in-plan conversion on February 3, 2026. Since Marie is over age 60 and it will be at least five years since January 1 of the year that Marie made her first Roth TSP contribution, Marie will not pay any federal or state income tax when her Roth TSP earnings are withdrawn.

Example 2. Steven is a federal employee aged 60 and has never contributed to the Roth TSP. Steven has a sizeable amount (almost $1.2 million) in his traditional TSP and starting in late January 2026, he intends to convert portions of his traditional TSP to the Roth TSP. When Steven performs his first Roth TSP in-plan conversion on January 28, 2026, he will create his Roth TSP account. In order for Steven to make income-tax free withdrawals from his Roth TSP account, Steven will have to wait until at least January 28, 2031 (the five-year anniversary of Steven’s first Roth TSP in-plan conversion).

Five-year rule for converted amounts

The second five-year rule applies only to money converted from a traditional TSP participant’s balance to the participant’s Roth TSP balance. Each time a Roth in-plan conversion a traditional TSP participant  performs starts a five-year clock that begins on January 1 of the year of each conversion. If a Roth TSP participant makes a withdrawal that includes converted money within five years of conversion, then the Roth TSP participant must pay a 10 percent early withdrawal penalty tax to the IRS unless an exception applies, such as being age 59½ or older.

This five-year rule only applies to the money that the traditional TSP participant converted, not the earnings on that money. This IRS rule is designed to prevent traditional TSP participants under the age of 59½ from avoiding the early withdrawal penalty by converting their traditional account to a Roth TSP account. It is separate from the five-year rule that determines whether the participant’s  Roth TSP earnings are qualified and can therefore be withdrawn tax-free. The following example illustrates:

Example 3. Margaret, age 55, has both a traditional TSP account and a Roth TSP account. She plans to retire at the full retirement age (FRA) of 57. Over the next two years, Margaret intends to contribute $20,000 a year to her Roth TSP account and to perform a one-time Roth TSP in-plan conversion of $50,000 on February 10, 2026. Starting when she is age 59.5, Margaret can make penalty-free (no 10 percent early withdrawal penalty) from  her “contributory”  Roth TSP  account (she is at least age 59.5). But she has to wait until January 1,2031 to make penalty-free withdrawals from her Roth TSP in-plan conversion account. This is because she has to wait five years from January 1 of the year she performed her Roth  TSP in-plan conversions (January 1, 2026),