Roth conversions for military retirees: retired pay, VA disability and the TSP

Your retired pay based on age or length of service is taxable. You report it as a pension on your federal return. It uses up your standard deduction and low brackets like any pension.

Your VA disability pay is not taxable. The IRS says to leave out of income any veterans' benefits paid under a law the VA runs, including disability pay. It doesn't appear on your tax return, so it doesn't raise your bracket. Your conversions are measured against your other income only.

Is your rating 50% or higher, with 20 or more years of service? Then concurrent retirement and disability pay (CRDP) gives back the retired pay your VA pay would otherwise offset. CRDP is retired pay, so it's taxable. Combat-related special compensation (CRSC) is not taxable. If your rating is below 50% without CRSC, your retired pay is cut by your VA amount. That lowers your taxable income further.

No. VA disability pay is not taxable income. It doesn't count toward your taxable income or your adjusted gross income, so it leaves your Roth conversion room alone. It also doesn't count toward the income Medicare uses for its surcharges. Say you have a 60% rating with a spouse. That is $18,792 a year (at the rate effective December 1, 2025) that uses none of your 12% bracket.

So you can have $90,000 or more coming in and still have a lot of room left in the 12% bracket. Size your conversion from your taxable retired pay and other taxable income, not your total deposits.

Your VA pay also isn't counted when the IRS figures how much of your Social Security is taxable. That keeps more of your benefit untaxed after you claim it.

Since January 28, 2026, you can convert traditional TSP money to Roth TSP inside the plan as a uniformed services member or retiree. The TSP can't withhold tax from your conversion. Federal employees and the TSP covers the steps and limits. It also covers whether to convert in the TSP or roll to an IRA.

What may be different for you is the tax-exempt balance. Traditional TSP contributions made from tax-free combat zone pay were never taxed. The TSP's rule says each conversion takes tax-exempt and pre-tax money in proportion. The tax-exempt contribution share of your conversion isn't taxed again. The rest is.

Check your TSP statement for a tax-exempt balance. If it is 10% of your traditional balance, about 10% of each conversion comes over without tax.

The Blended Retirement System (BRS) applies if you joined from 2018 on or opted in. It pays a smaller pension (2% of pay per year of service instead of 2.5%). It adds TSP matching of up to 5%. When you retire, you can take 25% or 50% of your discounted retired pay as a lump sum. Your monthly pay is then reduced until full Social Security age, usually 67.

That lump sum is taxable in the year you get it. A large lump sum can push you into the 22% or 24% bracket that year. That makes it a poor year for a big conversion. The years after, with smaller retired pay, may give you more room.

Survivor Benefit Plan (SBP) premiums come out of your retired pay before tax. They are 6.5% of the base amount you choose. The SBP annuity your spouse gets after your death is taxable to them, and they will file as single. A Roth they inherit is tax-free. If you worry about your spouse's taxes later, that matters. See Widows and widowers for how the switch to single brackets works.

It depends on your state. Many states exempt all or part of military retired pay. That exemption may not cover your TSP or IRA withdrawals, including Roth conversions. Check your state revenue department's rules for both, especially if you plan to move after retiring.

Timing matters too. Many service members retire in their 40s or early 50s and start second careers. Those working years can be expensive times to convert. Cheaper years usually come after your second career ends. That window runs until Social Security and required minimum distributions start. See Lowering tax on your RMDs.