Roth Conversion Blueprint for an $850K TSP (Live Demo)

If you’re a federal employee or retiree with a sizable Thrift Savings Plan (TSP), here’s what most people don’t realize: the TSP is excellent at helping you save during your working years, but it doesn’t help you decide when and how that money will be taxed in retirement.

That distinction becomes critically important once you stop working.

In this Retirement Income School™ lesson, we’ll start with TSP 101, walk through where tax challenges tend to show up in retirement, and then explore a live example of how a Roth conversion plan may be structured for an $850,000 TSP using a strategic, multi-year approach.

What the TSP Is Designed to Do

The Thrift Savings Plan is the federal government’s 401(k)-style retirement savings plan. Its core purpose is accumulation — helping federal employees build retirement assets during their working years through tax-deferred contributions, tax-deferred growth, and employer matching contributions.

This works very well during the accumulation phase of retirement, when the primary focus is saving and growing assets.

However, retirement planning doesn’t stop once you’ve built a large nest egg. In fact, that’s when a different set of questions begins.

The Three Phases of Retirement Planning

Retirement planning generally unfolds across three distinct phases.

1. The accumulation phase occurs during your working years. This is where regular contributions, employer matching, and tax-deferred growth help build your TSP balance.
2. The tax-planning phase often shows up in early retirement. This is the period where decisions about income recognition, Roth conversions, and long-term tax strategy become especially important.
3. The distribution phase comes later in retirement. Required Minimum Distributions begin, taxable withdrawals increase, Medicare income-based adjustments may apply, and survivor tax considerations become more relevant.

Many retirees spend decades focused on saving, but far less time thinking about how taxes will impact their retirement income across these phases.

Why TSPs Can Create Challenges in Retirement

TSPs are highly effective accumulation tools. Contributions are tax-deferred, growth is tax-deferred, and employer contributions can significantly enhance long-term savings.

The challenge is that large pre-tax balances can create tax pressure later in retirement.

As distributions begin, retirees may face Required Minimum Distributions that increase taxable income, higher Medicare premiums due to IRMAA, and higher marginal tax rates for a surviving spouse if one partner passes away.

This happens because the TSP was designed primarily as a savings vehicle — not as a tax-management tool in retirement.

2026 Update: Roth Conversions Inside the TSP

Beginning in 2026, the TSP is expected to allow Roth conversions. This adds some flexibility for participants and is an important update to be aware of for TSPs.

That said, the TSP remains an accumulation-focused platform. It is not designed for ongoing tax-bracket management, and multi-year Roth conversion planning may be operationally limited.

While this update is helpful, the availability of Roth conversions inside the TSP does not replace the need for coordinated, long-term tax planning.

Why Roth Conversion Planning Is Often Done Outside the TSP

Within the TSP, Roth conversion planning may be limited by reduced flexibility for partial conversions, limited control over tax-withholding mechanics, and a lack of coordination with a broader retirement tax strategy.

Rolling TSP assets to an IRA may allow for more intentional partial conversions, annual review and adjustment, and better coordination with income planning, Medicare considerations, and long-term tax goals.

This approach can improve planning flexibility, though it is not appropriate for every individual.

Using a Roth-Friendly Annuity During Conversion Years

In this educational example, a Roth-friendly fixed indexed annuity is used as a planning vehicle during the Roth conversion years.

The annuity is not used as an income source in this scenario. Instead, it may support principal protection during the conversion period, reduce exposure to market volatility while conversions are executed, and help manage how conversion-related taxes are paid.

This structure can support the consistent execution of a multi-year Roth conversion strategy while maintaining a defined level of risk management.

Case Study: Sam & Sally Sample

To illustrate how this planning might work, consider a simplified case study.

Sam and Sally are both age 60 and retired in January of 2026. Sam worked as a senior federal engineer, and Sally held a federal management role. Together, they have approximately $1.5 million in TSP assets and are evaluating the conversion of $850,000 to Roth over time.

They receive $120,000 annually from pensions, own a mortgage-free home, and maintain additional liquid savings. They plan to delay Social Security until age 70 and have a long planning runway before Required Minimum Distributions begin.

This profile creates an extended tax-planning window.

Conversion Goals

The objectives in this example include managing taxable income during early retirement, reducing future Required Minimum Distributions, increasing tax-diversified assets, and improving long-term planning flexibility.

Additional considerations include Medicare IRMAA, survivor tax brackets, and the desire to leave tax-efficient assets to heirs.

A Live Roth Conversion Walkthrough

Using Roth Blueprint ® software, watch the video to walkthrough a multi-year Roth conversion strategy using an FIA (Fixed Indexed Annuity).

The demonstration illustrates how tax brackets, timing, and asset structure interact over time. It also highlights the differences between paying conversion taxes externally versus managing them within a planning structure.

This walkthrough is educational in nature and designed to help illustrate the process, not to recommend a specific course of action.

Key Takeaways

• TSPs are effective accumulation tools, but retirement tax planning requires a different approach than saving.
• Roth conversions depend on timing, tax brackets, coordination with other income sources, and individual goals.
• In some scenarios, Roth-friendly annuity structures may support principal protection and tax-payment planning.
• Roth conversion strategies are highly individualized and are not appropriate for every situation.

 Ready to Retire Financially Relaxed?

My goal is to help you eliminate the fear of running out of money, avoid costly mistakes, and retire with confidence and security. When you have safe, predictable income in place, you’re free to actually enjoy retirement — not just worry your way through it.

👉 Learn more at the Retirement Income School™.
📞 Want to talk? Schedule a Retirement Income Q&A Call — I’d love to support you!

DISCLAIMER:
The information in this lesson is provided for general educational purposes only and does not constitute financial, legal, or tax advice. Retirement Income School™ and Dr. Amanda Barrientez do not provide individual investment recommendations. Always consult with a licensed advisor or tax professional before implementing any strategy discussed.