Author: Karen Schaeffer, CFP®
Big changes to the Thrift Savings Plan (TSP) have been announced and now is the time to determine what they mean for you and your ability to retire comfortably.
1. Roth In-Plan Conversions. Beginning January 2026 TSP participants will have the option to convert funds from their Traditional TSP balance to their Roth TSP balance. Caution: Just because it will now be allowed doesn’t mean everyone should do it. The amount converted will be treated as taxable income for the year and the taxes cannot be paid with TSP assets. While tax-free treatment on future earnings is certainly appealing, when does it benefit you? Without knowing your future tax bracket, the future tax law, and how long you will live, we are forced to make several assumptions that may or may not play out favorably. Everyone is encouraged to seek advice from a Certified Financial Planner Professional or a qualified tax adviser who can advise you not merely whether you can convert, but should you convert Traditional TSP money.
2. Mandatory Roth Contributions. Also beginning in January 2026, Federal employees aged 50 and older who earned more than $145,000 the previous year will be required to make any catch-up contributions to their Roth, not Traditional, TSP balance. Caution: This means more taxable income which means a bigger tax bill the following April. If you can afford to make some or all the catch-up contribution, it’s still a good way to build wealth. Just be sure to either increase your withholdings or set aside money on your own so you’re ready when you file your tax return.
3. Increased Contribution Limits. The contribution limit is projected to rise from $23,500 in 2025 to $24,500 in 2026. The catch-up contribution is expected to increase from $7,500 to $8,000 in 2026 and the special catch-up contribution limits for people aged 60-63 will remain at $11,250. Again, if you can afford to put more money in your TSP, contributing up to the maximum allowed means more money for you once you stop working.
These changes are significant and give every Federal employee the opportunity to enhance their retirement. In an ideal world, we would all have three distinct accounts to draw from:
- a pre-tax account, like Traditional TSP, that offers initial tax deductions and deferred taxation upon withdrawal,
- a tax-free account, like Roth TSP, that promises tax-free withdrawals, and
- an after-tax account non-retirement that offers flexibility and tax benefits for capital gains
By diversifying savings in this manner, we have the most flexibility to adapt to our changing tax brackets and tax laws in the future. Caution: Just make sure you realize that if you’re voluntarily paying taxes by choosing to convert Traditional TSP to Roth TSP, this strategy comes with a definite cost today and a hope, but not guarantee, of a benefit in the unknowable future.
Karen Schaeffer, CFP® is the Managing Member and Co-founder of Schaeffer Financial LLC, a financial consulting firm in suburban Washington, D.C. She has been advising clients for over thirty-five years and has developed a diverse client base including professional women, Foreign Service Officers, foreign nationals, and Federal government employees. She has been presenting seminars for NITP for over 25 years.
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