One of our site visitors asked a good question about the article I wrote titled “Can Federal Retirees Reach the Zero Tax Bracket?” Many are in this same situation, and YES, there is still a path to achieving this goal by applying the following investment techniques.
Madeline wrote, “I’m in the gap years (early 60s), and my TSP is roughly in the 500,000s. I would like to convert to a Roth TSP, but I don’t have the personal funds to pay the taxes.”
She continues on to explain, “I have not yet drawn from Social Security, and I’m not working. I live off my FERs pension and a monthly installment from my traditional TSP. I pay quarterly taxes since my last tax bill was over $3,000 for federal and $1,200 for state, and I take a few hundred a month for both fed and state from my monthly checks.”
“How can I effectively convert to a Roth given the above scenario?”
To effectively convert to a Roth TSP without personal savings for taxes, you must leverage your monthly Traditional TSP installments to clear your tax bill via increased withholding.
The Thrift Savings Plan (TSP) does not allow tax withholding directly out of an in-plan Roth conversion. However, because you are retired and already taking regular taxable distributions, you can manipulate your regular monthly payments to act as your funding source. [1, 2, 3]
Step 1: Request Tiny, Bite-Sized “Micro-Conversions”
Do not convert large chunks at once. The TSP allows you to execute up to 26 in-plan Roth conversions per year with a minimum of $500 per transaction.
- Log in to your TSP Account online.
- Submit a request for a small amount (e.g., $1,000 to $2,000).
- This shifts the money from traditional to Roth instantly inside your account.
Step 2: Pay the Tax via Your Monthly Installments
Because the TSP will not withhold taxes on the converted amount, you will calculate the tax owed on your small conversion and absorb it through your routine income.
- Calculate the tax hit: If you are in the 12% federal tax bracket, a $1,000 conversion generates a $120 federal tax liability.
- Adjust your monthly installment withholding: Log into your TSP account and update your tax withholding on your regular monthly installment checks.
- Withhold the difference: Temporarily increase your monthly tax withholding by that $120 (plus state tax percentage) to cover the conversion.
Step 3: Stop Making Quarterly Estimated Payments
You mentioned paying quarterly taxes because your withholdings weren’t high enough previously. By shifting your tax burden directly into your monthly TSP installment via high withholding percentages, you may be able to eliminate the need to write quarterly checks entirely. The IRS treats tax withholding as if it were paid evenly throughout the year, removing underpayment penalties.
Critical Guardrails to Keep in Mind
- Conversions are Permanent: Once you move traditional money to Roth inside the TSP, it is completely irrevocable and cannot be undone.
- Watch Your Tax Bracket: Ensure your total pension + TSP installments + conversions do not push you out of your current low tax bracket. Keep an eye on the IRS Tax Brackets annually.
- The 5-Year Rule: Your converted money needs to sit in the Roth TSP for 5 years before the earnings on that conversion can be withdrawn tax-free.
Final Thoughts
It makes sense to take advantage of your gap years, the window between retiring (when regular income drops) and the start of Required Minimum Distributions (RMDs) at age 73 (or 75 for those born in 1960 or later). These years offer a strategic, low-tax window to move pre-tax funds into a Roth IRA.
This technique can be quite advantageous when Required Minimum Distributions (RMDs) kick in, and your annual income increases each year. Avoid this tax hit that can arbitrarily increase your Medicare premiums significantly in retirement.
Last 5 posts by Dennis Damp
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Dennis V. Damp is an author, retired federal manager, business owner, career counselor and veteran. Damp is the author of 28 books, a recognized benefits expert, and a retired federal manager with 35 years’ service. Dennis has been a guest on hundreds of radio talk shows, CNN’s YOUR MONEY and the Lou Dobbs Cable TV shows, lectured at universities and colleges, produced Internet web sites and training videos, and has written hundreds of articles for national magazines and newspapers. His books have been featured in the Wall Street Journal, Washington Post, New York Times and U.S. News & World Report.
Dennis joined the Air Force in 1968 and spent over three years on active duty and an additional seven years with the Air National Guard. He was hired by the Department of Defense (DOD) after leaving active duty and transferred to the Federal Aviation Administration (FAA) in 1975. He spent the remainder of his career in various positions with the FAA. His last position was technical operations manager at the Pittsburgh International Airport’s air traffic control tower.
