Thrift Savings Plan Allows Roth Conversions, Cutting Future RMDs and Keeping Savings Invested
Updated
Updated · FedSmith.com · Sep 17
Thrift Savings Plan Allows Roth Conversions, Cutting Future RMDs and Keeping Savings Invested
3 articles · Updated · FedSmith.com · Sep 17
Summary
Federal employees and retirees can now convert Traditional TSP balances into Roth TSP accounts, adding a new planning tool beyond the usual trade-off of paying taxes now for tax-free withdrawals later.
Lower future required minimum distributions are a second benefit: smaller RMDs reduce the chance long-term retirement money is forced out as cash and left uninvested.
TSP distributions are paid in cash and sold proportionally from invested funds, so any RMD not needed for spending must be actively reinvested; some IRAs instead allow in-kind RMD transfers that keep assets invested.
Vanguard found 28% of IRA rollover proceeds were still in cash after one year, underscoring the risk that surplus withdrawals remain idle rather than compounding.
A $25,000 after-tax RMD left effectively in cash could grow to about $37,000 at 2% versus roughly $80,000 at 6% over 20 years, showing why Roth conversions should be judged on both tax savings and staying invested.