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Roth Convert Before or After Retirement?

There’s a lot of chatter today about Roth conversions. If you’re like most people, you’ve got questions:

  • What exactly is a “Roth conversion”?
  • Is that something I need to consider?
  • If so, should I do it while I’m still working? Or, should I wait until I retire? 
  • Can somebody PLEASE explain all this?!

As a financial planner at Christy Capital Management, I field such questions every day as I help federal employees plan successful retirements. 

So, let’s dive into this “hot topic.” First, let’s define terms. 

What is a “Roth Conversion”?

Most of the people we interact with have a good bit of money in a traditional TSP (i.e., a thrift savings plan). If that’s you, here’s what’s important to know: One day (i.e., whenever you start taking distributions from that account), you will have to pay taxes on that money, at whatever your going tax rate is. 

However, you can reduce your future tax burden now by moving some of the money in your TSP over to a Roth account.

Understand that you can’t do that inside of your TSP. Instead, the way it works is you essentially “withdraw” a certain amount of that money from your TSP. You go ahead and pay the taxes due on that money now. Then you put those funds into a Roth account where they can grow tax-free. 

Later, you can withdraw that money tax-free as long as: 

1. You are at least 59 and a half.

2. You have had your Roth account for at least five years.

This process of shifting money from a traditional retirement account to a Roth account is called a Roth conversion

Do you see the advantage? It’s the difference between withdrawing $50,000 from your TSP in retirement–and owing taxes on all that money…and withdrawing $50,000 from your Roth IRA–and owing no taxes! 

The obvious question is: When is the best time to do Roth conversions? Should you do it while you’re still working–or is it wiser to wait till after retirement?

It depends on how you answer a few questions…

What tax bracket are you in?

To make a wise decision about Roth conversions, look first at your tax bracket. 

(NOTE: I’m going to make some very general statements here that will not apply to everyone, but will apply to many. In short, before you make any big financial decisions, always solicit professional advice–from either a financial planner or a tax expert. You want to make sure a Roth conversion strategy is right for your unique situation.)

Generally speaking, most federal employees are either in the upper 22% tax bracket or the lower 24% bracket.

  • If you’re single and about to retire from the federal government, you’ll probably be somewhere at the low end of the 24% bracket. 
  • If you’re married, but your spouse doesn’t work, you might be at the top of the 22% tax bracket. 
  • If you’re married and your spouse is employed, then you’ll likely be in the 24% bracket.

Again, your situation may be very different. But for the vast majority, this breakdown is at least “in the ballpark” of where most federal workers find themselves. 

What tax rate are you comfortable paying?

After determining your tax bracket, you need to decide At what rate am I comfortable paying taxes? 

Most of the people we talk to are willing to shift some of their traditional TSP money to Roth as long as they can remain in the 22% tax bracket. A few are willing to do Roth conversions even if that strategy pushes them up into the 24% bracket. The deciding factor for whether you should shift money before or after retirement is What tax rate am I comfortable with?

What if tax rates rise in years to come?

Keep in mind that the Trump tax cuts are scheduled to “sunset” (i.e., expire). As the law stands, in 2026, the 22% tax bracket is set to rise to 25% and the 24% bracket is set to jump to 28%. 

If you believe these tax cuts will, indeed, go away, it may make sense for you to start moving your TSP money now, before tax rates rise. 

However, if you believe Congress and the President will come together before 2026 and agree on an extension of these tax cuts–or offer tax relief through new legislation–then you may conclude there’s no need to hurry.

You have a couple of years to decide. Do you want to move money while you’re in the 22% bracket? Are you willing to move money even if that decision pushes you into the 24% bracket? Those are the questions to wrestle with.

If you decide that the 22% rate is the most you’re willing to pay and you’re in the 22% bracket now, you may* find you have room to do some Roth conversions now (*as long as you’re not at the very top of the bracket). 

Another consideration: Many federal employees, upon retirement, move from the top of the 22% bracket down to the bottom of the 22% bracket. That allows them to Roth convert–and remain in the 22% bracket–after retirement. 

If you’re not optimistic about the Trump tax cuts being renewed or extended, you may decide you’re willing to move up into the 24% bracket now–since tax rates in the 22% and 24% brackets are set to rise to 25% and 28%, respectively. That would allow you to Roth convert some money now while you’re working, then convert more once you retire (assuming your income dips a bit, as it does with many retirees). 

All of this hinges, of course, on whether Roth conversions are something you want to do. 

An example

Let’s say Joe has a $1,000,000 balance in a traditional TSP. (Good for Joe!) And let’s say he has decided he wants to do some Roth conversions.

Joe’s goal is to lower his traditional balance so that when he arrives at his RMD (required minimum distribution) age, he won’t be forced to withdraw huge amounts of taxable money and end up in a higher tax bracket.

Joe needs to understand that a million dollars is a lot of money to Roth convert if he insists on staying in the 22% tax bracket. That preference may mean he is only able to convert $10,000- $15,000 a year. At that rate, he’d hardly put a dent in a $1,000,000,000 TSP balance, even over a decade.

In your case, look at your current TSP balance. Then do some math. How many years do you have until you turn 75 (the new RMD age) and are required to take distributions?

Knowing those numbers will allow you to calculate how much you need to Roth convert each year. And, of course, you’ll want to factor in how much you expect your traditional account balance to grow over that time frame. That will depend on how aggressive or conservative your investments are. 

To make headway on Roth converting a large traditional TSP balance, most people find they have to move up into the 24% tax bracket. If you are willing to do that, then you can start Roth converting while you’re still working. And you can convert more each year.

On the other hand, if you decide you’re not comfortable being in the 24% bracket, the majority of your conversions will have to wait until retirement, when your income may dip and make it possible for you to accommodate such financial moves.

So, to answer the question–Should I Roth convert while working or wait until retirement?–the answer is, “It all depends on your tax preferences, comfort level, and the specifics of your situation.”

Here’s what we at Christy Capital Management recommend:

  1. Determine if Roth conversions are even something you wish to do. 
  2. Decide what tax rates you are willing to pay.
  3. If you can Roth convert while working–and pay the desired tax rate you want–go ahead and get started. If you’re not sure, talk with a financial or tax professional.

After reading this article, you may be thinking, “Roth conversions sound like a smart strategy, but now I’m worried I’ve waited too long!” If so, check out this video: “Is it too late to start Roth TSP?” 

I believe Roth conversions are a smart, but underutilized strategy for people approaching retirement. So, be sure to check out that video. 

If you have $400,000 in your TSP and would like to work with an experienced financial planner with a thorough understanding of federal programs and benefits, please reach out to our team at Christy Capital. 

Click here and leave your contact information. We’ll be in touch right away.

Our mission is to help you take the mystery out of retirement. We want your next chapter to be your best chapter!

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