Here’s a startling fact: the booming stock market of recent years could mean a bigger tax bill for retirees in 2026. But don’t panic just yet—there’s a silver lining and some smart moves you can make to soften the blow.
For the third consecutive year, the U.S. stock market delivered impressive gains in 2025, capping off a remarkable streak. U.S. stocks surged by 17% in price returns, following a 23% jump in 2024 and a 24% leap in 2023. This rally pushed key indices to unprecedented heights: the S&P 500 nearly hit 7,000, and the Dow Jones Industrials soared past 48,000. While this is great news for Thrift Savings Plan (TSP) participants, it also signals a potential tax challenge for federal employees and retirees in 2026.
And this is the part most people miss: retirees aged 73 or older who hold TSP accounts will likely face larger required minimum distributions (RMDs) in 2026, especially if their portfolios are heavily weighted toward the stock funds (C, S, and I). Why? Because 2026 RMDs are calculated based on the account values as of December 31, 2025. Higher balances mean higher RMDs, which in turn translate to larger federal and state income tax liabilities.
However, there’s a silver lining—two, actually. First, the One Big Beautiful Bill Act of 2025 (OBBBA) extended the lower federal income tax rates for at least five more years, providing some relief. Second, larger RMDs in 2026 will likely reduce future TSP balances, leading to smaller RMDs down the road.
But here’s where it gets controversial: should you take action now to reduce future RMDs and tax burdens? Here are three strategies traditional TSP participants might consider:
Roth In-Plan Conversion: Starting January 28, 2026, TSP participants can convert portions of their traditional TSP to a Roth TSP. This reduces the traditional TSP balance, potentially lowering future RMDs. However, this move triggers taxable income in the year of conversion, so it’s crucial to assess your tax situation carefully. Questions to ask: Will this push you into a higher tax bracket? Do you have cash on hand to cover the tax bill? Is the upfront tax cost worth the long-term benefits?
Direct Rollover to a Traditional IRA: Participants aged 55 or older (or 59.5 for those still working) can roll over part of their traditional TSP to a traditional IRA. This reduces the TSP balance and may lower future RMDs. From there, you could convert the IRA to a Roth IRA, but again, this comes with immediate tax implications. Is this a better option than a Roth in-plan conversion?
Qualified Charitable Distributions (QCDs): For charitably inclined individuals aged 70.5 or older, QCDs offer a tax-efficient way to reduce TSP balances. By rolling over funds to a traditional IRA and then making a QCD, you can satisfy RMDs without increasing taxable income. In 2026, the QCD limit is $111,000. But is this strategy right for you, especially if you’re not already planning significant charitable giving?
Each of these strategies has its pros and cons, and the right choice depends on your unique financial situation. Here’s a thought-provoking question for you: With tax laws constantly evolving, how confident are you in your ability to navigate these decisions alone? Consulting a tax professional could be the key to maximizing your retirement savings while minimizing tax liabilities.
About Edward A. Zurndorfer:
Edward A. Zurndorfer is a CERTIFIED FINANCIAL PLANNER®, Chartered Life Underwriter, Chartered Financial Consultant, Registered Health Underwriter, and Enrolled Agent based in Silver Spring, MD. He provides tax planning, federal employee benefits, retirement, and insurance consulting services through EZ Accounting and Financial Services. Disclaimer: The information provided is for general purposes only and should not be considered professional advice. Always consult a qualified expert for personalized guidance.
