For the third year in a row, the US stock market had big gains in 2025 echoing the gains from prior years. During 2025, US stocks added 17 percent on a price return basis. This follows a 23 percent gain during 2024 and a 24 percent gain during 2023.
Among stock market assets hitting all-time highs during 2025:
(1) The S&P 500 nearly touched 7,000; and
(2) the Dow Jones Industrials surpassed 48,000.
While the stock market performance is encouraging news for Thrift Savings Plan (TSP) participants, it also suggests some TSP tax-planning moves that some federal employees and retirees should consider performing during 2026.
Larger TSP RMDs During 2026
For TSP participants who are retired from federal service and who are age 73 or older, the year 2026 will likely mean larger TSP required minimum distributions (RMDs), especially for those retired TSP participants who are invested mostly in the three stock funds; that is, the “C”, “S” and “I” funds. The record year-end 2025 stock indices will mean larger RMDs because 2026 TSP RMDs are based entirely on December 31, 2025 traditional TSP account values. Larger TSP RMDs during 2026 results in larger 2026 federal and state income tax liabilities for traditional TSP participants.
The larger TSP RMDs during 2026 may however have a “silver lining” for two reasons, namely:
(1) Individual federal income tax rates which have been low for the past eight years (as a result of passage of the Tax Cuts and Jobs Act of 2017) were due to expire on 12/31/2025. However, the passage of the One Big Beautiful Bill Act of 2025 (OBBBA) extended the low individual federal income tax rates for at least the next five years; and
(2) Larger RMDs during 2026 force more traditional TSP funds to be withdrawn during 2026. This will most likely result in smaller traditional TSP balances in the future and therefore lower traditional TSP RMDs in the future.
3 Actions Traditional TSP Participants Should Consider
There are some actions that traditional TSP participants may want to consider performing in order to decrease future TSP RMDs amounts. These actions are:
(1) Converting the portions of the traditional TSP account to the Roth TSP account;
(2) Direct rollover of traditional TSP to a “rollover” traditional IRA; and
(3) Direct rollover of traditional TSP to a “rollover” traditional IRA and then making a qualified charitable distribution (QCD) from the traditional IRA. Each action is now discussed.
Conversion of Traditional TSP to Roth TSP
SEE ALSO: What You Should Know About the Roth TSP in-Plan Conversion Option
Starting January 28, 2026 TSP participants will have the option of converting their traditional TSP account to the Roth TSP account. Both employees and retirees will be able to perform this conversion. This conversion is called a “Roth in-plan conversion.”
The purpose of a Roth in-plan conversion is to transfer portions of the traditional TSP to the Roth TSP. In so doing, a TSP participant will decrease the amount the participant’s current year traditional TSP account and therefore potentially decrease future TSP RMDs. This is because, effective January 1, 2024, the TSP RMD is calculated each year using only the prior end-of-year (December 31) traditional TSP balance. Prior to January 1,2024, the TSP RMD was calculated using the end-of-year combined traditional TSP and Roth TSP balances.
Questions to Ask Before Performing a Roth In-Plan Conversion
Before performing any Roth in-plan conversion, there are several questions that a traditional TSP participant should ask. These questions focus on the immediate effect on current year’s federal and state income taxes the TSP participant would owe as a result of the conversion. TSP participants are advised that Roth in-plan conversions are fully taxable for both federal and state income purposes:
‧ How will a conversion affect the TSP participant’s taxable income for the year?
‧ How much federal and state income taxes will the TSP participant need to pay on the amount of the traditional TSP account being converted?
‧ Will the conversion raise the TSP participant’s federal marginal tax rate?
‧ Does the TSP participant have enough liquid cash to pay the income tax on the conversion?
Roth in-plan conversions are complex, especially with respect to the tax consequences resulting from a conversion. For that reason, TSP participants who are considering a conversion should consult a tax professional in order to plan a conversion strategy.
SEE ALSO: TSP Issues Policies on New Roth In-Plan Conversion Option
Direct Rollover of Traditional TSP to a Traditional IRA
SEE ALSO: Rollover of a Traditional TSP Account to a Traditional IRA
TSP participants who retire from federal service at age 55 or older are permitted to request a direct rollover of portions of their traditional TSP to a traditional IRA – a “rollover” traditional IRA. TSP participants who are in federal service and who are age 59.5 or older can also request a direct rollover of portions of their traditional TSP to a traditional IRA – “rollover” traditional IRA. The TSP participant then has the option of converting portions or all of the “rollover” traditional IRA to a Roth IRA
By directly rolling over a portion of their traditional TSP to a “rollover” traditional IRA the TSP participant will decrease the traditional TSP account balance and quite possibly future TSP RMDs.
Similar to Roth in-plan conversions, a traditional IRA owner should ask themselves several questions that focus on the immediate effect on federal and state income taxes the that would be owed as a result of the Roth IRA conversion. Traditional IRA owners are advised that Roth IRA conversions are fully taxable for federal and state income tax purposes.
Since traditional IRAs are subject to RMDs, traditional IRA conversions to Roth IRAs should ideally be done before the year TSP and IRA RMDs begin. For retired TSP participants and traditional owners, this is age 73.
SEE ALSO: Should Federal Employees & Retirees Conduct Roth IRA Conversions?
How Qualified Charitable Distributions Can Benefit Traditional IRA Owners
SEE ALSO: Understanding Qualified Charitable Distributions (QCDs): The Importance of Timing to Maximize Tax Benefits
TSP participants who are charitably inclined may want to consider qualified charitable distributions to reduce their traditional TSP balances. QCDs can be made by traditional IRA owners who are at least age 70.5. During 2026, eligible traditional IRA owners can make QCDs totaling a maximum of $111,000.
QCDs must be performed as a direct transfer from a traditional IRA to a qualifying charity. In order for a TSP participant who is at least age 70.5, to take advantage of the QCD, the TSP participant would have to perform a direct rollover of a portion of the participant’s traditional TSP to a traditional (“rollover”) IRA. Once the TSP funds are directly rolled over to the traditional IRA, a QCD can be performed using the “rollover” traditional IRA funds. In so doing, The TSP participant has decreased the traditional TSP balance in a tax-free manner.
If a TSP participant is aged 73 or older also owns “contributory” traditional IRAs and other “rollover” traditional IRAs, then the participant’s traditional IRA is also subject to an RMD. The participant can then make another QCD for the traditional IRA. Under IRS rules, if the amount of QCDs is equal to or greater than the annual traditional IRA RMD, then the IRA RMD for that year has been satisfied with no tax consequences.