For the vast majority of federal employees, the traditional Thrift Savings Plan (TSP) is the cornerstone of their retirement savings. While this has provided incredible tax deferral during a federal career, it also means a good chunk of that money is not truly yours—it belongs to the IRS. They will collect their share one way or another.
The core advantage you possess as a retiree is the control over when and how you pull that money out of your traditional TSP. Using this control to strategically manage your taxable income throughout retirement is the single most effective way federal employees can legally reduce the share the IRS owns, saving thousands in lifetime taxes.
The Traditional TSP Tax Challenge
Every time you take a withdrawal from your traditional TSP, a piece of that money must go to the IRS. The default withholding is often 20%, but the exact percentage you owe ultimately depends on your income tax bracket for that year. The goal is to avoid skyrocketing into high tax brackets during retirement, which leads to paying more taxes over time than necessary.
Your retirement income will naturally have ups and downs. For FERS employees, this flow could involve the following:
- Retirement with a FERS annuity.
- The FERS Supplement, which ends at age 62.
- A gap before starting Social Security (often delayed until age 67 or later).
Fluctuations like these create years where your taxable income is naturally lower, providing a perfect window for powerful tax planning: strategic Roth conversions.
Strategic Roth Conversions: The Key to Smoothing Income
A Roth conversion is the process of moving money from your pre-tax traditional TSP or IRA into a Roth account (Roth TSP or Roth IRA). Because the money was tax-deferred, the amount you convert is counted as taxable income in the year of the conversion.
The purpose of this strategy is to pay taxes now, during a low-income year, so the money can grow and be withdrawn completely tax-free later.
Filling Up the Low Tax Brackets
The greatest value of a Roth conversion comes from performing it when your income is temporarily low, allowing you to “fill up” a low tax bracket without spilling over into a higher one.
Consider the $23,851 to $96,950 range for married couples filing jointly in the 2025 tax brackets, which is taxed at 12%.
- Example: A couple’s regular taxable income (pension, small withdrawals) is $80,000. This places them squarely in the 12% tax bracket.
- The top of the 12% bracket is $96,950.
- This leaves about $16,950 worth of “room” in the 12% bracket $96,950 – $80,000.
- The couple can convert up to $16,950 from their traditional TSP to a Roth account, paying only 12% tax on that converted amount.
If this same money were left in the traditional TSP, it might eventually be pulled out when their income is higher (e.g., when RMDs and Social Security begin), potentially pushing the withdrawal into the 22% bracket. Converting at 12% versus withdrawing later at 22% represents a 10% tax savings on that portion of the savings.
By taking advantage of these low-income windows—such as the years between the FERS Supplement ending and Social Security starting—you efficiently strip the traditional TSP balance of future tax liability.
The Power of a Smooth Retirement Income
The core principle behind this tax strategy is simple: maintaining a smooth income stream throughout retirement.
If your income is constantly fluctuating—skyrocketing into high tax brackets one year and plummeting the next—you are generally going to pay more lifetime taxes. High-income spikes lead to higher marginal tax rates and potentially increase your Medicare Part B premiums (IRMAA surcharges).
The goal is to move money from the Traditional TSP to a Roth account when your tax rate is manageable (the “lows”) and then, during years of high income (the “spikes”), potentially pulling needed withdrawals from your Roth accounts, which are tax-free. This keeps your taxable income level and predictable.
By smoothing your taxable income, you avoid wasting low tax brackets and minimize exposure to high tax brackets, ensuring that you pay only what is legally required—and not a dollar more. The funds converted to a Roth account then grow tax-free for the rest of your life, providing a powerful, tax-free source of income for future use.