I believe that leaving your future to chance is a recipe for a stressful retirement. Every year, thousands of federal employees leave the Thrift Savings Plan (TSP) to move their money into an Individual Retirement Account (IRA) to take advantage of greater flexibility and tailored investment strategies. However, navigating that transition the wrong way can result in massive taxes and penalties.
With the monumental changes coming to the TSP in 2026, it is more important than ever to understand the rules of the road before you move your hard-earned money.
The Big Changes Coming to the TSP in 2026
Before you even consider a rollover, you must understand the new features arriving in 2026 under the SECURE 2.0 Act, as they could drastically alter your tax and rollover strategy:
- Roth In-Plan Conversions: Starting in January 2026, you can finally convert your traditional (pre-tax) TSP balances—including your employer match—directly into your Roth TSP balance while you are still working or in retirement. This is a phenomenal tool if you want to lock in today’s historically low tax rates and enjoy tax-free compounding. However, the TSP does not withhold taxes on these conversions; you must pay the tax bill from your outside personal savings.
- Mandatory Roth Catch-Up Contributions: If you are 50 or older and your wages exceeded the designated threshold (around $145,000), your catch-up contributions will now be forced into the Roth TSP. You lose the upfront tax deduction on those contributions, which could push your tax bill higher during your working years.
- Higher Contribution Limits: The basic elective deferral limit increases to $24,500, and for those aged 60 to 63, a new “super catch-up” provision allows an additional $11,250 in contributions.
Should You Roll Over Your TSP to an IRA?
There is much to consider before leaving the TSP. The TSP’s biggest advantage is its incredibly low expense ratios, which historically have been a fraction of what you pay in the private sector. This has changed somewhat since Exchange Traded Funds have become popular and now have extremely low expense ratios, often less than .05%. Fidelity now offers a number of funds with no fees!
I’ve cautioned readers for years to beware of financial planners who charge 1% to 1.65% annually to manage your money. Over time, high fees will devour your nest egg.
Conversely, an IRA provides thousands of investment options compared to the TSP’s core five funds, giving you greater flexibility to build a diversified, income-producing portfolio and manage your tax strategies like executing outside Roth conversions or Qualified Charitable Distributions (QCDs).
I rolled over my TSP at age 76 to ensure that our heirs would be able to roll over my wife’s Beneficiary Participant Account to an inherited IRA.
The 2026 Guide to a Flawless IRA Rollover
If you’ve decided an IRA is the right move for you, you must navigate the transfer perfectly. A mistake here can cost you a fortune. Follow these critical steps:
- Always Demand a Direct Rollover Never let the money touch your personal hands or your checking account. You want a direct rollover where the funds go straight from the TSP to your new IRA custodian (like Vanguard, Schwab, or Fidelity). If you request a check payable to you (an indirect rollover), the TSP is legally required to withhold 20% for taxes. To avoid massive tax penalties, you would then have to come up with that 20% out of your own pocket to deposit the full amount into the IRA within the 60-day window. Always insist on a direct, institution-to-institution transfer!
- Don’t Fall into the “Rule of 55” Trap Federal employees who separate from service during or after the year they turn 55 (or age 50 for special provision employees like law enforcement) can access their TSP immediately without the standard 10% early withdrawal penalty. However, IRAs do not have this same protection. If you retire at 57 and roll your entire TSP balance into an IRA, your money is locked down. If you withdraw from that IRA before age 59 ½, you will be hit with an automatic 10% IRS penalty. The Solution: If you retire before 59 ½, calculate exactly how much money you need to bridge the gap until you reach that age. Leave that “bridge” amount safe in the TSP and only roll over the remainder to your IRA.
- Satisfy Your RMDs First Required Minimum Distributions (RMDs): You must withdraw money from your tax-deferred accounts at age 73 or 75, depending on your birth year. If you are in your 70s and subject to RMDs, you must take your RMD for the year from the TSP before you roll the remaining balance over to an IRA. Rolling over an RMD is prohibited by the IRS and creates a terrible tax mess that cannot be applied to future years.
- Keep Like with Like (Tax Rules) Ensure your traditional (pre-tax) TSP dollars roll directly into a Traditional IRA, and your Roth TSP dollars roll directly into a Roth IRA. If done correctly, there are zero taxes and zero penalties on the transfer. If you decide you want to move from a traditional plan to a Roth IRA, you will trigger a taxable event on the entire converted amount, so plan carefully. Also, keep in mind that if your Roth TSP includes employer matching funds, those matching funds and their earnings have historically been placed in a pre-tax balance and must be rolled into a traditional IRA to avoid immediate taxation.
The Bottom Line
Taking control of your retirement funds moving into 2026 opens up incredible tax-planning opportunities, but it requires diligent planning and an actual investment strategy. Don’t roll your money over simply because an advertisement says it’s “free”.
Do your homework, evaluate your fees, consult with a qualified financial or tax professional who understands federal benefits, and make sure you have a solid plan in place before your money ever leaves the TSP. Stay invested wisely, and protect the assets you’ve worked a lifetime to accumulate!
Last 5 posts by Dennis Damp
- How to Choose the Best Retirement Age for Your Future - August 8th, 2026
- Survivor Benefit: How to Protect Your Spouse’s Income - July 25th, 2026
- Long-Term Care Planning for Federal Employees - July 18th, 2026
- Can Federal Retirees Reach the 0% Tax Bracket? - July 11th, 2026
- Federal Retirement 5-Year Rule: What Employees Need to Know - July 4th, 2026
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.
