The Thrift Savings Plan (TSP) is the primary retirement savings vehicle for most federal employees and uniformed service members. Thanks to its low fees and automatic payroll deductions, it’s hard to beat for building wealth over a long career. But what should you do with those savings when you change jobs or retire? With major TSP changes rolling out in 2026, federal employees need to understand their rollover options and how new rules could affect their strategy.
Why Consider a Rollover?
When you separate from federal service, you generally have four options for your TSP balance:
* Leave the money in the TSP. TSP expenses are among the lowest of any retirement plan, and the funds are simple to manag. Staying can be a smart choice if you like the investment options and don’t need to make withdrawals.
* Roll the money into another employer’s plan. If your new employer offers a 401(k) or 403(b) with good funds and low fees, you can request a direct rollover from TSP to that plan. Direct rollovers avoid the 20 % mandatory withholding applied to lump‑sum distributions.
* Roll your TSP into an IRA. You can choose either a traditional or Roth IRA. FINRA notes that no taxes are due if you roll assets from a traditional TSP account to a traditional IRA or from a Roth TSP balance to a Roth IRA. However, moving pre‑tax money to a Roth IRA triggers income tax on the amount converted .
* Cash out your account. This is rarely a good idea. If you withdraw before age 59½, the IRS generally treats the distribution as an early withdrawal and you could owe a 10 % penalty plus federal and state taxes.
For most federal employees, a direct rollover to an IRA or employer plan preserves tax advantages and keeps your money invested for retirement.
Direct vs. Indirect Rollovers
Always request a direct rollover rather than an indirect one. With a direct rollover, TSP sends your money straight to the new plan or IRA, and you never handle the funds. Indirect rollovers require you to deposit the distribution into the new account within 60 days, and TSP must withhold 20 % for taxes . You’ll need to use personal funds to replace the withheld amount or the IRS will tax and penalize the shortfall.
Key TSP Changes Coming in 2026
The SECURE 2.0 Act authorized several TSP updates that will take effect in 2026. These changes create new opportunities—especially around Roth conversions—but also introduce new rules federal employees need to plan for.
Roth In‑Plan Conversions
Historically, TSP participants who wanted Roth dollars had to direct new contributions to Roth or roll money out to a Roth IRA. Starting in 2026, Roth in‑plan conversions will be available directly within TSP . This feature lets you transfer part of your pre‑tax balance into the Roth side of your account.
* You can choose how much to convert, but the converted amount is treated as taxable income in the year of conversion.
* Once converted, future growth and qualified withdrawals from your Roth balance will be tax‑free.
* Planning tip: consider conversions in years when your income is temporarily lower—such as early retirement—to minimize the tax hit. Converting gradually can also help reduce future required minimum distributions (RMDs), giving you more control over your taxable income later in life.
TSP warns that converting to Roth cannot be undone and raises your current tax bill. You must pay the tax from other funds (not from the amount converted) , so consult a tax advisor before making this irreversible choice.
Mandatory Roth Catch‑Up Contributions
Under SECURE 2.0, if your earnings exceed an indexed threshold (currently ~$145,000 for 2025), any age‑50 catch‑up contributions must go into the Roth portion of TSP starting January 1, 2026 . That means you’ll pay taxes on those contributions now, but withdrawals later will be tax‑free. High‑earning federal employees should review their tax diversification strategy to ensure they’re comfortable paying taxes upfront.
Lifecycle Fund Updates
The TSP will adjust its Lifecycle (L) Fund lineup in 2026. The L 2025 fund will merge into the L Income fund, and a new L 2075 fund will be introduced for participants with longer time horizons. Even if you’re close to retirement, review your L Fund choice to make sure its risk level aligns with your withdrawal plans.
New Planning Tools
To help participants with the upcoming changes, TSP plans to release digital tools such as a Roth conversion estimator and enhanced calculators for RMDs and withdrawal planning. These tools will let you model “what‑if” scenarios before making irreversible moves . Use them to preview the tax impact of Roth conversions or see how different withdrawal schedules affect your account.
Practical Tips for Federal Employees
With these changes on the horizon, here’s a checklist to prepare:
1. Review your tax bracket projections. Estimate where your income will fall in 2025 and 2026; low‑income years are prime opportunities for Roth conversions.
2. Revisit your TSP savings mix. If catch‑up contributions will soon be Roth, make sure your overall allocation still fits your long‑term plan.
3. Evaluate your L Fund selection. Confirm the fund’s risk level and time horizon match your retirement goals.
4. Model conversion scenarios. Whether you convert inside TSP or via an IRA, test how different amounts affect your taxes and future RMDs.
5. Consult professionals. Integrate TSP strategies with your FERS pension, Social Security and other savings; a fiduciary planner can help you navigate complex rules.
Final Thoughts
Rolling over your TSP balance isn’t a one‑size‑fits‑all decision. Leaving assets in TSP offers unmatched low fees and simplicity, but a rollover to an IRA may provide more investment options and flexibility—especially if you’re pursuing specialized strategies or need an integrated portfolio. Use direct rollovers to avoid unnecessary taxes and be cautious about promotional claims that seem too good to be true.
As 2026 approaches, understanding Roth in‑plan conversions, mandatory Roth catch‑up contributions, and the new TSP tools will help you make informed choices. Review your options, run the numbers, and seek professional advice before making any irreversible moves.
