Roth In-Plan Conversions

<RULE> FEDERAL RETIREMENT THRIFT INVESTMENT BOARD <CFR>5 CFR Parts 1605, 1650, and 1690</CFR> <RIN>RIN 3222-AA00</RIN> <SUBJECT>Roth In-Plan Conversions</SUBJECT> <HD SOURCE="HED">AGENCY:</HD> Federal Retirement Thrift Investment Board. <HD SOURCE="HED">ACTION:</HD> Final rule. <SUM> <HD SOURCE="HED">SUMMARY:</HD> The Federal Retirement Thrift Investment Board (FRTIB) is amending a regulation to permit participants in the Thrift Savings Plan (TSP) to convert amounts in their traditional TSP balances to their Roth TSP balances, subject to applicable tax consequences. </SUM> <EFFDATE> <HD SOURCE="HED">DATES:</HD> The effective date is January 28, 2026. </EFFDATE> <FURINF> <HD SOURCE="HED">FOR FURTHER INFORMATION CONTACT:</HD> <E T="03">For press inquiries:</E> James Kaplan at (202) 465-5220. For other inquiries: Laurissa Stokes at (202) 942-1645. </FURINF> <SUPLINF> <HD SOURCE="HED">SUPPLEMENTARY INFORMATION:</HD> The FRTIB administers the TSP, which was established by the Federal Employees' Retirement System Act of 1986 (FERSA), Public Law 99-335, 100 Stat. 514. The TSP is a retirement savings plan for Federal civilian employees and members of the uniformed services. It is similar to cash or deferred arrangements established for private-sector employees under section 401(k) of the Internal Revenue Code (26 U.S.C. 401(k)). The provisions of FERSA that govern the TSP are codified, as amended, largely at 5 U.S.C. 8351 and 8401-80. <HD SOURCE="HD1">I. Background</HD> A Roth in-plan conversion allows a TSP participant to move funds from a traditional (pre-tax and tax-exempt) balance to a Roth (after-tax) balance within the TSP. This conversion triggers taxation on the converted amount but offers the potential for tax-free withdrawals in retirement. Since Roth TSP contributions were introduced in 2012, participants have expressed interest in converting traditional balances to Roth balances within the plan. The 2024 TSP Participant Satisfaction Survey asked participants about their interest in a Roth in-plan conversion feature. Thirty-five percent of respondents who were familiar with Roth contributions replied that they are “likely” or “extremely likely” to use an in-plan conversion feature if offered in the TSP. In response, the FRTIB collaborated with its record keeper to enable these conversions, which require a regulatory amendment. <HD SOURCE="HD1">II. Proposed Rule</HD> On October 15, 2025, the FRTIB published a proposed rule in the <E T="04">Federal Register</E> (90 FR 48267) to amend 5 CFR part 1650 by adding Subpart F. This new subpart establishes rules for Roth in-plan conversions in the TSP. <HD SOURCE="HD1">III. Response to Public Comments</HD> The FRTIB received comments from 36 individuals and entities in response to the proposed rule regarding Roth in-plan conversions within the TSP. Overall, commenters supported adding this feature, noting its potential to increase flexibility in retirement planning for TSP participants. To organize our response, we have grouped the comments into four general categories: • In-scope comments addressing the substance of the proposed rule; • Out-of-scope comments about topics beyond the scope of this rulemaking; • Comments related to tax liability implications; and • Miscellaneous comments that did not fit neatly into the other categories. Before addressing the public comments, we will respond to two rulemaking petitions received during the comment period. The petitioners alleged procedural deficiencies under the Regulatory Flexibility Act, the Paperwork Reduction Act, and the Unfunded Mandates Reform Act. Specifically, the petitioners claimed the rule would negatively impact small entities and that the FRTIB failed to comply with requirements under these Acts to assess such impacts. Upon review, we find the petitioners' concerns to be unfounded. The rule applies exclusively to TSP participants and does not impose any obligations on other entities, including other defined contribution plans. Additionally, the petition reflects a misunderstanding of the rule's origin, incorrectly attributing its issuance to the Internal Revenue Service (IRS) rather than the FRTIB. Accordingly, the FRTIB denies the petitions. We find no procedural deficiencies in the rulemaking process. <HD SOURCE="HD2">A. In-Scope Comments</HD> <HD SOURCE="HD3">1. Conversion Frequency</HD> Two commenters recommended that the final rule specify the number of Roth conversions permitted annually, rather than leaving this determination to the discretion of the TSP record keeper. The FRTIB agrees with this recommendation and has revised the regulatory text to allow participants to request up to a maximum of 26 conversions per calendar year. This limit aligns with the biweekly pay schedule used by many federal payroll offices and provides participants with regular opportunities to manage their retirement savings strategy. Participants may make multiple conversions within a single pay period; the rule does not restrict them to one conversion per pay period. <HD SOURCE="HD3">2. Eligibility To Request In-Plan Conversions</HD> One commenter asked for clarification regarding who may request a Roth in-plan conversion. A conversion may be requested by “a participant or a beneficiary participant.” This includes active participants, separated participants who maintain TSP accounts after leaving federal service, and surviving spouses of deceased participants for whom a separate beneficiary participant account has been established. Non-spouse beneficiaries or alternate payees are not eligible to request Roth in-plan conversions. <HD SOURCE="HD3">3. Conversion of Tax-Exempt Balances</HD> One commenter recommended that the rule permit Roth conversions of tax-exempt balances, such as contributions made from combat zone pay, in addition to pre-tax balances. The term “traditional balance”, as defined in the 5 CFR 1690.1, encompasses both tax-exempt balances and pre-tax balances. Accordingly, the FRTIB confirms that the final rule authorizes conversions of both tax-exempt balances and pre-tax balances. These conversions must comply with IRS pro rata requirements, which mandate that any Roth conversion proportionally include tax-exempt and pre-tax amounts based on their ratio of the total traditional balance. <HD SOURCE="HD3">4. $500 Conversion Minimum</HD> One commenter recommended elimination of the $500 minimum for Roth in-plan conversions “[t]o facilitate immediate or automatic conversions.” The FRTIB established the $500 minimum to discourage small, frequent conversions that could increase administrative complexity and costs, and to promote operational efficiency. A minimum threshold ensures that conversions are substantive and mitigates potential burdens on the TSP's recordkeeping system. The $500 amount was selected as a reasonable balance between flexibility for participants and operational considerations for the TSP record keeper. Accordingly, the final rule retains the $500 conversion minimum. <HD SOURCE="HD3">5. $500 Minimum Balance</HD> Four commenters objected to the provision requiring participants to retain $500 in each balance type with payroll contributions. This requirement is designed to mitigate the impact of payroll errors and corrections, which are typically small and often under $500. For example, if a payroll office mistakenly deposits funds into the wrong balance, having a buffer in place ensures that those errors can be easily corrected without creating negative balances or operational complications. Accordingly, the final rule retains the requirement that participants keep at least $500 in each of their tax-deferred employee contribution, tax-exempt contribution, agency automatic (1%) contribution, and agency matching contribution balances when requesting a Roth conversion. <HD SOURCE="HD3">6. Automatic Conversion Tool</HD> Two commenters suggested implementing a tool that would automatically convert traditional balances to Roth balances once the traditional balance reaches a certain threshold amount. While the FRTIB understands the appeal of automation, Roth in-plan conversions carry significant tax implications. To ensure participants make informed and deliberate decisions, the FRTIB will not implement automatic conversions. <HD SOURCE="HD2">B. Out-of-Scope Comments</HD> Several comments offered valuable perspectives on TSP participant preferences and concerns. Although these suggestions are beyond scope of this rulemaking, the FRTIB will consider them as part of its ongoing evaluation of TSP features and efforts to address participant needs. <HD SOURCE="HD3">1. Different Investment Allocations for Roth and Traditional Balances</HD> Fifteen commenters requested the ability to allocate Roth and traditional balances to different TSP funds. While the FRTIB understands the rationale for these requests in light of common financial planning strategies, implementing such functionality would require extensive modifications to the TSP's recordkeeping and investment systems. These changes would involve significant programming, testing, and operational adjustments, resulting in increased complexity and costs for all participants. Because these modifications are beyond the scope of this rulemaking, they are not addressed in the final regulation. Similarly, one commenter expressed concern that investment allocations are shown for traditional and Roth balances in the aggregate and not as separate balances, on participant statements and My Account, and therefore participants are prevented from determining the allocation of specific fund holdings of those balances. The TSP's investment and recordkeeping systems are designed to apply a single investment allocation across the entirety of a participant's account regardless of tax treatment. Allowing separate allocations for traditional and Roth balances would re ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━ Preview showing 10k of 24k characters. Full document text is stored and available for version comparison. ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━