TSP Roth Conversions CZTE: Traditional to Roth Combat Zone

Please note, this is a draft article I'm publishing early to start getting feedback and identifying opportunities in this new tax and retirement account plan. This is not polished and some of my math may be wrong. Please leave a comment if I missed something.

Starting in January 2026, Thrift Savings Plan (TSP) participants will have an additional tax planning tool available. You will be able to convert a portion of your traditional (pre-tax) TSP balance to your Roth (after-tax) balance. More details on TSP Roth in-plan conversions here.

For military servicemembers eligible for Combat Zone Tax Exclusion pay (CZTE), this opens up some interesting opportunities. For example, you could convert tax-exempt Traditional TSP contributions pro-rata to your Roth TSP and gain the triple tax benefit of combat zone pay.

This also opens up the opportunity if you are in a higher tax bracket one year to contribute to your Traditional TSP, take the tax deduction, and then convert the Traditional TSP money to your Roth account when you are in a lower tax bracket year. This happens often in the military during combat zone deployments.

Some of the rules include:

• You must leave $500 remaining the Traditional TSP account if some of your contributions were payroll contributions or DOD matching contributions
• You can make up to 26 Roth in-plan conversions per calendar year. This is per account if you have civilian and military TSP.
• Minimum amount to convert is $500
• Conversions are performed “pro-rata,” or “proportionally”

Pro-rata means that if you have $100,000 in your Traditional TSP, and $50,000 is tax-exempt CZTE contributions, than when you convert any amount to your Roth TSP the amount is converted as 50% tax-exempt and 50% taxable.

If you converted $50,000 of your $100,000 Traditional TSP balance to Roth TSP one year, $25,000 would be tax-exempt and $25,000 taxable. The next year if you converted the remaining $50,000, same thing. The ratio of tax-exempt to taxable contributions is maintained. Pro-rata is Latin for “proportional.” The proportion must be maintained. You can't just move the tax-exempt money unfortunately.

Anyone in the Blended Retirement System (BRS) has money in the Traditional TSP since the 1% automatic agency contribution and 4% matching contributions go into the Traditional TSP.

Where this opportunity gets very interesting is CZTE or Combat Zone Tax Exclusion areas.

12 month deployment = $87,000 of Tax Free Money

Let's say a servicemember is in a CZTE January to December and earns $100,000 in base pay, or $8,333 per month. This would be about a 22 year E-9 or 8 year O-3. $100k per year is below the CZTE income limit of the highest ranking enlisted position, so it's all federal income tax free.

The TSP contribution limits are $24,500 for 2026 elective deferral and $72,000 annual additions limit.

You can go up to the annual additions limit with Traditional TSP contributions that are tax-exempt, aka contributions made to the Traditional TSP while you are CZTE eligible.

Here's the setup:

• 24% contributions to your Roth TSP
• 48% contributions to your Traditional TSP
• $15,000 into you and your spouses Roth IRA ($7,500 each)

Every month, you convert the tax-exempt Traditional TSP contribution to your Roth TSP. The money is converted “pro-rata,” meaning that if there is $10,000 in the account and $5,000 is tax-exempt, and $5,000 taxable, when you move $1,000 over it's a 50/50 split between tax-exempt and taxable. In other words, you can't just move the tax-exempt portion.

By the end of the year, you've paid $0 in federal income taxes on your $100,000 of base pay. You've managed to build:

• $72,000 in to your Roth TSP (the $24k of contribution and the $48k of tax-exempt conversions)
• $15,000 of Roth IRA contributions
• $87,000 of Roth contributions in a single year for a married filing jointly O-3

Oh, and you're probably receiving BAH, BAS, etc as well.

Let that $87,000 grow for 30 years at 10%: $1.5 million

Pull 4% a year off of that = $60,000 per year for life. Tax free.

6 Month Deployment = $74k tax free

Let's say you only deploy to CZTE for 6 months of the year, January to June.

You can still get a good chunk of money into your Roth TSP and Roth IRA:

• 24% contributions to your Roth TSP throughout the year to hit elective deferral limit
• 70% contributions to your Traditional TSP while in CZTE, turn off before you get back in June/July
• $15,000 into you and your spouses Roth IRA ($7,500 each)

End of the year:

• + $24,000 into Roth TSP
• + $35,000 tax-exempt contributions into Traditional TSP, convert monthly to Roth TSP
• = $59,000 total into TSP, well below $72k limit
• + $15,000 into Roth IRA

= $74,000 into Roth accounts for a 6 month deployment, grows to $1.3mm over 30 years at 10%.

Taxable income for the year is $50,000 minus MFJ standard deduction of 32,200 = $17,800 you're in the 10% bracket. You'll probably get a savers credit too.

Less than $1,780 of income taxes on $100,000 of income. 1.78% effective tax rate. And that's not even including BAH, BAS, COLA.

Military pay is very low taxed.

Bonus Info

If you know the year before you are deploying, you could make Traditional IRA and Traditional TSP contributions, take the tax deduction in that prior year at 12%, and then convert them during your CZTE year at a very low tax rate, say you pay 10% or lower.

You can make 26 conversions per year, so you probably want to do a conversion every month to clear money out of the Traditional TSP so there is no growth balance that you'll have to pay taxes on.

But even if you wait until December to just make the conversion once, let's say the market rips and is up 30% for the year, you'll have to pay a bit of taxes on $14,000 of growth. (0.3 x $48,000. And the $48 wasn't all in there at the start of the year, so not much to worry about).

You'll also need to leave $500 behind in the Traditional TSP account, because of rules.

TSP In-Plan Roth Conversion Examples

O-4, Married, No Kids, 2 Year Deployment

12 year O-4 in the US Navy. BAH with dependent. Our Lieutenant Commander is stationed in Bahrain from January 2026 to Dec 2028.

Our O-4 tries to max Roth TSP in the first year and go up to annual additions limit of $72,000 into Traditional TSP.

SM deploys for January in first year to December second year. 24 months total CZTE.

First Year of Deployment:
Monthly base pay: $9,888
Total Income: $9,888 x 12 = $118,656, all CZTE Tax Free (under the 38 year E-9 + HF/IDP $225 CZTE limit)

Roth TSP: $24,500 ($2,041.66 per month, or 21% of base pay)
BRS 5% Match: $5,933 goes into Traditional TSP, not marked tax-exempt

Traditional TSP Annual Additions Limit: $72,000 - $5,933 (5% match) - $24,500 (Roth TSP contribution) = $41,567
$3,416 per month to contribute = 34% Traditional TSP contribution
$40,992 total tax-exempt Traditional TSP contribution for year

That's 55% total Roth + Traditional TSP contribution + 5% match = $71,425, under the $72,000 limit, nice.
$4,449 per month to live on without including BAS, assuming BAH is all taken, COLA probably also available in CZTE locale

- Standard deduction: $16,100
= Taxable Income: $0
Total Income Tax: $0

All the Traditional TSP contributions you make are marked "tax-exempt."

Second Year of Deployment:

Your Traditional TSP grows by 10%, so now you have $46,925 x 10% = $4,692 of Traditional Earnings, which are taxable.
You also have the government match in your Traditional account: $5,933.
You can't just rollover the tax-exempt portion, but it doesn't matter much for our calculation.
So your total taxable balance your converting to Roth is $10,625.
And tax-exempt balance is $40,992.
So you just have $10,625 of taxable income, MFJ standard deduction takes care of that.

You can also do an in service conversion of your Traditional TSP balance 26 times per year. So in December before you depart the CZTE you can convert the second years contributions. I guess you could just contiusously convert throughout the year so you don't have any taxable growth to worry about.

Might add another $8,000 to your taxable income (growth + BRS 5% match). Standard deduction still covers it.

Now you just got $144,000 into your Roth TSP in 2 years and paid $0 in taxes. Nice work!

O-5 with 16 years of service

In this example, you have an Army Lt Col who is not married, has no dependents, and is on a 1 year deployment to Camp Arifjan Kuwait.

Monthly base pay: $11,392
+ Total Income: $11,392 x 12 = $136,704
- Max Traditional TSP: $24,500
- Standard deduction: $16,100
= Taxable Income: $96,104
Total Income Tax: $15,855
Top of the 22% bracket

SM deploys for January to December.
Remember to subtract the highest enlisted pay is the maximum CZTE for an officer.
$11,392 - $10,729 (38 year E-9) = $663 x 12 = $7,956 taxable income for the deployed servicemember.

Taxable Monthly Base Pay income: $7,956
+ Convert Traditional to Roth TSP $24,500
= Total Income $32,456
- Standard deduction $16,100
= Taxable Income $16,356
Total Income Tax: $1,715
Bottom of the 12% bracket, could convert another about $34,000 and stay in the 12% bracket.

Dual military O-5 with 16 years of service, 2 kids.

2026 Tax Rate	Single Filer	Married Filing Jointly	Head of Household
10%	$0 to $12,400	$0 to $24,800	$0 to $17,700
12%	$12,401 to $50,400	$24,801 to $100,800	$17,701 to $67,450
22%	$50,401 to $105,700	$100,801 to $211,400	$67,451 to $105,700
24%	$105,701 to $201,775	$211,401 to $403,550	$105,701 to $201,750
32%	$201,776 to $256,225	$403,551 to $512,450	$201,751 to $256,200
35%	$256,226 to $640,600	$512,451 to $768,700	$256,201 to $640,000

Base pay: $11,392
Total Income: $11,392 x 12 = $136,704 x 2 = $273,408
Max Traditional TSP: $24,500 x 2 = $49,000
Standard deduction: $32,200
Taxable Income: $192,208
Income Tax: $31,710
- Child Tax Credit: $4,400
Total Tax: $27,310
Top of the 22%


One spouse deploys for January to December. Remember to subtract the highest enlisted pay plus Hostile Fire/Imminent Danger Pay (HF/IDP) $225 is the maximum CZTE for an officer. $11,392 - ($10,729 + $225) (38 year E-9) = $438 x 12 = $5,256 taxable income for the deployed family member.

Total Household income: $136,704 + $5,256 = $144,660
Standard deduction: $32,200
Bottom of the 22% bracket
Income Tax: $14,165

Triple Tax Benefit of Combat Zone Pay

United States military servicemembers have tremendous tax benefits. One of the best is the triple tax benefit of Combat Zone Tax Exclusion (CZTE) pay. This allows you to earn income, pay no federal income tax, invest the money in a Roth account, and pay no capital gains or income tax on that money for the rest of your life.

To recap: No federal income taxes (up to an annual limit) on the money when you earn it, no taxes on the growth and income of your investments, and no taxes when you withdraw the money after age 59 and a half.

If you are interested in talking to a tax advisor about this, I recommend Nectarine. Nectarine is like the Uber of financial advisors. You can find an advisor that specializes in military tax issues and have a conversation with them for as low as $150 per hour.

I recommend booking an hour with a financial advisor on Nectarine to help you think through your TSP Roth conversion decision.