New for 2026: Starting January 28, 2026, the Thrift Savings Plan (TSP) will allow Roth in-plan conversions—meaning you can convert some of your Traditional TSP balance into your Roth TSP without leaving the plan.
If you're in the Blended Retirement System (BRS) and you ever deploy to a Combat Zone Tax Exclusion (CZTE) area, this is one of the most powerful "legal loopholes" in military finance.
📊 Quick Takeaway: A service member deploying for 12 months can potentially put $77,000-$80,000+ into tax-free Roth accounts in a single year—building what could grow to over $1.3 million in tax-free retirement wealth over 30 years. Even a 6-month deployment can create over $1 million in tax-free money.
What Is a TSP Roth In-Plan Conversion?
A Roth in-plan conversion lets you move money from Traditional TSP (pre-tax) → Roth TSP (after-tax) inside your TSP account.
This matters because Roth money (when qualified) can be withdrawn tax-free in retirement. So the game becomes: Pay little-to-no tax now → lock in tax-free growth later.
Why This Is a Game-Changer for Military Members
Before January 28, 2026, if you wanted to convert Traditional TSP to Roth, you had to leave the TSP system, roll it to a Traditional IRA, then convert to Roth IRA (triggering taxes). Now you can do it all within TSP—simpler, cleaner, and with lower administrative costs.
Why This Is Huge for BRS (and Anyone With Traditional TSP Money)
If you're in the Blended Retirement System, you likely have Traditional TSP dollars even if you've been "Team Roth" your whole career, because:
- The 1% automatic contribution goes into Traditional
- The matching contributions (up to 4%) go into Traditional
So BRS members naturally build a Traditional TSP balance that can now be converted.
💡 Important BRS Note: The 5% BRS match (1% automatic + up to 4% matching) goes into Traditional TSP and counts toward the $72,000 annual additions limit. This means if you're maximizing contributions in a CZTE year, your personal contributions (Roth + Traditional) plus the government match cannot exceed $72,000 total.
Why CZTE Is the Cheat Code
A CZTE can make all (or part) of your military pay federal income tax-free for qualifying months. This creates a rare combo of:
- Very low taxable income, and
- Very high retirement contribution capability
That's where Roth conversions shine. You can contribute massive amounts to Traditional TSP (tax-free because of CZTE), then convert those dollars to Roth while your overall taxable income is near zero.
What Is Combat Zone Tax Exclusion (CZTE)?
CZTE is an IRS provision that excludes military pay from federal income tax when you serve in designated combat zones. This includes:
- Basic pay
- Reenlistment/extension bonuses (if signed in combat zone)
- Hostile Fire/Imminent Danger Pay
- Most special pays earned in the combat zone
Not included: BAH and BAS (already tax-free)
⚠️ Important for Officers: Commissioned officers have a monthly CZTE cap equal to the highest enlisted pay rate (approximately $10,295 for 2026) plus Hostile Fire/Imminent Danger Pay ($225). This means an O-4 earning $100k in base pay won't have all income excluded—only approximately $10,520 per month qualifies for CZTE.
For enlisted members, warrant officers, and commissioned warrant officers, all military pay for each month in a combat zone is excluded from federal taxation.
Perfect for conversions!
If YES, conversions can still work!
1. Max Roth TSP: $24,500
2. Add Traditional TSP up to $72k total
3. Convert monthly to Roth
4. Fund Roth IRAs
Potential: $70k-$80k+ in Roth!
1. Contribute what you can to Roth TSP
2. Convert existing Traditional TSP during low-tax CZTE year
3. Fund Roth IRAs if possible
Still powerful!
You're ready to execute the strategy starting Jan 28, 2026
Build emergency fund first. Never use TSP money to pay conversion taxes.
The 2026 Limits You Need to Know (Plain English)
There are two "big" limits people confuse:
1) Elective Deferral Limit (Your normal TSP contribution limit)
- 2026: $24,500 (this is your own Roth + Traditional contributions combined)
- This is the same limit that applies to 401(k)s and other similar retirement plans
2) Annual Additions Limit (the "deployment max" limit)
- 2026: $72,000 (this includes your contributions + government contributions)
- This higher limit is what makes the CZTE strategy so powerful
Key CZTE rule: Roth TSP contributions are limited to the elective deferral limit ($24,500), so if you contribute beyond that while deployed, the extra typically ends up in Traditional TSP and is marked as "tax-exempt."
3) Catch-Up Contributions
- Age 50+: Additional $8,000 catch-up contribution
- Ages 60-63: Additional $11,250 catch-up contribution
- Age 64+: Returns to $8,000 catch-up contribution
Then Convert to Maximize Roth:
($24,500 direct + ~$42,500 converted)
🎯 Total Roth in One Year: $80,000+
Pro-Rata Rule (The One Detail That Changes Everything)
Conversions are pro-rata. That means conversions include a proportional mix of taxable and tax-exempt dollars based on your entire Traditional TSP balance.
You can't "pick only the tax-exempt portion."
Understanding Pro-Rata With Examples
Example 1: Simple Pro-Rata
- Traditional balance = $10,000
- Tax-exempt portion = $5,000 (from CZTE contributions)
- Taxable portion = $5,000 (from BRS match)
- Convert $1,000 → it's treated as ~$500 tax-exempt and ~$500 taxable
Example 2: Heavy Tax-Exempt Balance
- Traditional balance = $50,000
- Tax-exempt portion = $45,000 (90% from CZTE)
- Taxable portion = $5,000 (10% from BRS match)
- Convert $10,000 → it's treated as ~$9,000 tax-exempt and ~$1,000 taxable
Why Pro-Rata Actually Helps You: While you can't cherry-pick only tax-exempt dollars, the pro-rata rule actually works in your favor during CZTE years because most of your Traditional TSP is tax-exempt (from CZTE contributions), your overall taxable income is already low (due to CZTE), and the small taxable portion gets taxed at very low rates (often 0% or 10%).
Scenario 1: 12-Month CZTE Deployment (The "Roth Rocket Fuel" Year)
Let's use a clean, realistic example:
- Married filing jointly
- In a CZTE for January through December
- $100,000 in base pay for the year (~$8,333/mo)
- Enlisted or Warrant Officer (all pay is CZTE-eligible)
If your pay is CZTE-eligible for the whole year, your federal taxable income can be extremely low—sometimes near zero after the standard deduction.
The Setup (One Simple Way)
- Max Roth TSP up to the elective deferral limit ($24,500)
- Put the rest (up to the annual additions limit) into Traditional TSP while in CZTE
- Convert monthly from Traditional → Roth
- Also fund two Roth IRAs (you + spouse)
Complete Example with Numbers
Total Income:
- Base pay: $100,000 (all CZTE tax-free)
- This is approximately $8,333/month
TSP Contribution Strategy:
- Roth TSP contributions: $24,500 (your elective deferral max)
- BRS 5% match: $5,000 (goes into Traditional TSP, not marked tax-exempt)
- Additional Traditional TSP from CZTE pay: $42,500
- Total into TSP: $72,000 (hits the annual additions limit)
How to Set Your Contributions:
- Roth TSP: 21% of base pay (approximately)
- Traditional TSP: 34% of base pay (approximately)
- Total TSP contributions: 55% of base pay
- BRS automatically adds 5% on top
Breakdown:
- $24,500 Roth TSP (stays in Roth)
- $47,500 Traditional TSP (composed of $42,500 tax-exempt + $5,000 taxable match)
- Tax-exempt portion of Traditional: ~89% ($42,500 / $47,500)
- Taxable portion of Traditional: ~11% ($5,000 / $47,500)
Monthly Conversions:
Throughout the year, you convert your Traditional TSP balance to Roth. Because of the pro-rata rule, converting $42,500: approximately $37,850 is tax-exempt, $4,650 is taxable.
Roth IRAs:
- You: $7,500 (or $8,600 if 50+)
- Spouse: $7,500 (or $8,600 if 50+)
- Total Roth IRA: $15,000 (or $17,200 if both 50+)
What This Can Build in One Year
Conservative estimate (both under 50):
- Roth TSP after conversions: ~$62,350
- Roth IRAs: $15,000
- Total Roth: ~$77,350
Taxes Owed
Even though you converted Traditional TSP, your taxable income for the year might look like:
- CZTE income: $0 (excluded)
- Taxable portion of conversions: ~$4,650
- Gross income: $4,650
- Standard deduction (MFJ, 2026): $32,200
- Taxable income: $0
You may owe zero federal income tax for the year while building a massive Roth balance.
What Happens Over 30 Years?
If $77,350 grows at 10% average annual return for 30 years:
- ~$77,350 → ~$1.35M
- A 4% withdrawal rule of thumb → ~$54,000/year
- Potentially tax-free (qualified Roth withdrawals)
Breaking Down the Math:
- Year 10: ~$200,000
- Year 20: ~$520,000
- Year 30: ~$1,350,000
All growing completely tax-free, with no Required Minimum Distributions (RMDs).
- Convert monthly (not once at year-end) to minimize taxable growth
- Set contributions to hit $72,000 by December
- Make quarterly estimated tax payments to avoid penalties
- Keep emergency fund intact—never use TSP money for taxes
Scenario 2: 6-Month CZTE Deployment (Still Insanely Powerful)
Now let's say you're in a CZTE from January through June.
You can still do a strong version of the strategy:
Example with Numbers
Income:
- Base pay: $100,000 annual
- CZTE months (Jan-June): $50,000 (tax-free)
- Non-CZTE months (Jul-Dec): $50,000 (taxable)
TSP Strategy:
- Roth TSP: $24,500 (spread throughout the year)
- Traditional TSP during CZTE months: Increase to 50% for Jan-June to build up tax-exempt Traditional
- BRS 5% match: $5,000
- Total TSP: ~$54,500
Roth IRAs: $15,000 (or $17,200 if both 50+)
What You Might Build
Total in Roth accounts (under 50):
- Roth TSP: ~$45,250 ($24,500 direct + $20,750 converted)
- Roth IRAs: $15,000
- Total: ~$60,250
Why Taxes Can Still Be Tiny
Your taxable income for the year:
- Non-CZTE base pay (Jul-Dec): $50,000
- Taxable portion of conversions: ~$4,250
- Gross taxable income: $54,250
- Standard deduction (MFJ, 2026): $32,200
- Taxable income: $22,050
At 2026 rates, married filing jointly, you'd pay approximately $2,205 in federal tax—an effective federal tax rate of about 4% while putting over $60k into Roth accounts.
6-Month Deployment 30-Year Projection
If $60,250 grows at 10% average annual return for 30 years: ~$60,250 → ~$1.05M. With a 4% withdrawal rate → ~$42,000/year tax-free.
Even a 6-month deployment can create over $1 million in tax-free retirement wealth!
Taxable income after deduction: ~$22,000
Federal tax: ~$2,200
Effective rate: ~4%
Taxable income after deduction: ~$0
Federal tax: ~$0
Effective rate: 0%! 🎉
30-Year Growth Projection (10% avg. annual return)
6-Month = $42,000/year tax-free | 12-Month = $54,000/year tax-free
Practical Tips (So You Don't Get Burned)
1) Consider converting monthly
If the market rises during the year, waiting until December could mean converting more earnings (which can be taxable if they're tied to taxable Traditional dollars). Monthly conversions can reduce the "oops, my taxable growth ballooned" problem.
Recommended approach:
- Set a calendar reminder on the 1st of each month
- Log into TSP.gov
- Convert approximately 1/12 of your target amount
- This smooths out market volatility and minimizes taxable growth
2) Know the TSP conversion guardrails
TSP Conversion Rules (Confirmed for 2026 Launch):
- Minimum conversion amount: $500 per conversion
- Maximum conversions: 26 per calendar year (per TSP account)
- Leave-behind requirement: You must maintain at least $500 in each Traditional TSP contribution source
- Processing timing: Conversions requested before noon ET process after market close same day; after noon ET process next business day
- No withholding: TSP does not withhold taxes on conversions—you must pay estimated taxes
- Irrevocable: Once processed, conversions cannot be reversed or undone
3) State taxes still matter
While federal income may be tax-free during CZTE, state taxes on Roth conversions vary by state. Some states may still tax Roth conversions even if the original income was CZTE-excluded at the federal level.
States with no income tax (best for conversions):
Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming
States that fully exempt military pay:
Alabama, Hawaii, Illinois, Kansas, Massachusetts, Michigan, Mississippi, New Jersey, Pennsylvania, Wisconsin
Check your state's tax treatment with our state-by-state military retirement tax guide.
4) Make estimated tax payments
Since TSP doesn't withhold taxes on conversions, you'll likely need to make quarterly estimated tax payments to avoid underpayment penalties.
Quarterly deadlines:
- Q1 (Jan 1 - Mar 31): Due April 15
- Q2 (Apr 1 - May 31): Due June 15
- Q3 (Jun 1 - Aug 31): Due September 15
- Q4 (Sep 1 - Dec 31): Due January 15 (following year)
How This Fits Your Retirement Plan
This TSP Roth conversion strategy is most powerful when it connects to your overall military retirement plan:
- What will your military retirement pay be?
- How much VA disability will you receive?
- How much will you keep after federal + state taxes?
- Which state makes your retirement income go the farthest?
Calculate Your Complete Military Retirement Income
See your exact monthly income including retirement pay, VA disability, and state tax impact. Understand how this TSP Roth strategy fits into your bigger picture.
Use the Free Calculator →Calculating Your Military Retirement
High-3 System:
- Average of highest 36 months of basic pay
- Multiply by 2.5% per year of service
- 20 years = 50% of high-3
- 30 years = 75% of high-3
BRS System:
- 2% multiplier per year of service
- 20 years = 40% of high-3
- Plus TSP match (which you're maximizing!)
- Plus continuation pay at 12 years
Adding VA Disability
VA disability is:
- Tax-free federal and state
- Not subject to offsets in most cases
- Ranges from 10% ($176.03/mo) to 100% ($3,842.43/mo) as of 2026
Example combined income:
- E-8 retirement (20 years, BRS): $1,800/mo
- VA disability (100%): $3,842/mo
- Total: $5,642/mo mostly tax-free
- Plus your massive Roth TSP you're building now
Compare your retirement options across all 50 states: State-by-State Military Retirement Tax Guide
Frequently Asked Questions
Can I do this if I'm not in BRS?
Yes. BRS just makes it more common to have Traditional dollars (match + 1%). But anyone with Traditional TSP money may benefit. High-3 retirees with Traditional TSP balances can absolutely use this strategy.
If I'm in a CZTE, is everything automatically tax-free?
Not everything. CZTE applies to certain pay types (basic pay, special pays, bonuses signed in the combat zone) for qualifying months. Housing allowances (BAH) and subsistence allowances (BAS) are already tax-free. Rules differ for commissioned officers, who have a monthly cap.
Can I convert only the tax-exempt part?
No—conversions are pro-rata. TSP will automatically convert a proportional mix based on your entire Traditional balance.
Will conversions change my contribution limits?
No. Conversions are not "contributions." They're an internal transfer/conversion event. You can still max out your $24,500 elective deferral limit regardless of how much you convert.
Can I convert while I'm still on active duty?
Yes! Both active and separated TSP participants are eligible for Roth in-plan conversions starting January 28, 2026. You don't need to retire or separate to use this feature.
What if I'm deployed for only part of the year?
You can still benefit! A 6-month deployment can still generate substantial Roth savings (see Scenario 2 above showing how to build $60k+ in Roth accounts with a 6-month deployment).
How do I actually request a conversion?
Starting January 28, 2026, you'll be able to request conversions through your TSP account at tsp.gov. Log into My Account and follow the conversion instructions. TSP will provide detailed guidance when the feature launches.
Do state taxes apply to conversions?
It depends on your state of legal residence. Most states follow federal treatment (so CZTE would exclude it), but some states have different rules. Check our state-by-state guide for your specific state's treatment of military income and Roth conversions.
Bottom Line: Your Action Plan
Starting January 28, 2026, Roth in-plan conversions give service members a new way to move Traditional TSP dollars into Roth—without leaving TSP.
If you combine that with a CZTE year, you can potentially create a massive, long-term tax-free retirement bucket—the kind that turns one deployment year into decades of compounding.
The Math in Simple Terms
Single deployment year:
- Max your Roth TSP: $24,500
- Push more into Traditional TSP during CZTE: up to the $72k annual additions limit
- Convert monthly to Roth during your low-tax year: ~$42,500
- Add Roth IRAs for you and your spouse: up to $17,200
- Result: $60k-$80k+ into tax-free accounts in a single deployment year
Over 30 years at 10% returns:
- That single year could grow to well over $1 million in tax-free money
- 4% withdrawal rate: $40,000-$54,000 per year in tax-free income
Your Next Steps
If you're deploying in 2026:
- Before deployment: Review this strategy with your spouse, calculate your target contribution percentages, ensure you have emergency fund to cover any taxes
- Month 1 of deployment: Update MyPay contributions to maximize toward $72k, set up automatic Roth IRA contributions, make your first TSP Roth conversion
- Monthly during deployment: Convert Traditional → Roth (approximately same amount each month), contribute to Roth IRAs, track totals toward annual limits
- End of deployment year: Final conversions in December, verify you hit your targets, gather tax documents for filing
- April (tax time): File tax return showing conversions, pay any remaining tax (should be minimal)
If you're not deploying soon:
- Run your retirement projections: MilitaryRetirementCalc.com
- Compare state tax impacts: State Tax Guide
- Build your Traditional TSP balance (so you have more to convert later)
- Save cash outside TSP for future conversion taxes
- Bookmark this guide for when you do deploy
Remember
This is one of the most powerful wealth-building opportunities available to service members. Don't leave this money on the table. A single deployment year, properly planned, can set up decades of tax-free retirement income.
That's financial freedom.