BRS Breakdown, Part 2: Mega Backdoor Roth Conversion for the Military

If you're serving in the military and joined in 2018 or later, you're covered by the Blended Retirement System (BRS); some who joined sooner may have opted-in. That means at least 3 of every 4 Americans in uniform today are covered by the BRS. Yet there isn't a lot of good strategy and advice out there yet, because the 25% of the military who are in the Legacy High-3 system are also the senior leaders who are supposed to train and mentor the next generations. If they have no experience handling Service-Matching Contributions, Continuation Pay, or Lump Sum Payments, they can hardly be expected to offer you decent help.

That can be a problem, because in the Legacy system you could go 20 years in uniform without making a single choice. Not so with the BRS. In fact, with the BRS you need to personally manage it every year -- and if you don't, you can easily miss out on benefits or fall into some serious tax traps. You need a strategy that takes advantage of very specific tax rules and loopholes, some that are only open while you're in uniform. If you do, you can save tens or hundreds of thousands of dollars over a 20-year career.

The key is understanding the tax traps of the BRS:

• Your service-matching contributions (5%) are ALWAYS deposited into your Traditional TSP, which means you have to pay Federal Income Tax when you take that money out after age 59 1/2
• You will also be taxed on the gains on those matching funds, and that tax will be at the ordinary income tax rates of 10%, 12%, 22%, 24%, 32%, or higher, instead of lower capital gains rates
• Over the course of a 20-year career the value of the Service-Matching funds could be:
  • Enlisted. $47,751 based on 2024 Base Pay Rates, and over $142,000 after 20 years if you invest those funds in the TSP C Fund for your entire career
  • Officer. $88,734, and over $205,000 after 20 years if invested in the TSP C Fund
• If you leave the funds in your Traditional TSP for another 18 years until you retire and start withdrawing funds at age 59 1/2, those account balances could be $576,000 to $861,000 or more!

Imagine being a multimillionaire in retirement thanks to your BRS benefits, but finding out that you may owe the IRS $150,000, and potentially much, much more, because such a huge chunk of your savings were in a taxable Traditional TSP? Big yikes! Fortunately, if you have a plan while you're in uniform and earning these matching funds, you can avoid this massive tax headache for Future You: it's a special technique that is totally legal and allowed by the IRS called the "Backdoor Roth Conversion".

In this post we'll explain how you can "convert" all those Traditional TSP dollars into a Roth account where your retirement savings can grow 100% tax-free. And here's the kicker: it works best when you're deployed to or stationed in a Combat Zone Tax Exclusion (CZTE) location where you may be able to legally avoid paying tax on the conversion altogether!

What is the Backdoor Roth Conversion?

At its core, the Backdoor Roth Conversion is a strategy that allows you to convert pre-tax money from your Traditional TSP into a Roth account, allowing the money to grow tax-free for the rest of your life. Normally, this is done by converting from the employer-sponsored retirement account (a 401(k)) into a Roth Individual Retirement Account (IRA). Unfortunately, the TSP does not allow you to rollover or convert your savings into an IRA while you're on active duty. If you're in for just 4-8 years, that's not a big deal and you can probably wait: if you have $2,000 to $20,000 in your Traditional TSP at separation and take 3-6 months off work, your taxable income will be low enough that a conversion that year should be nearly tax-free.

That's because converting from a Traditional to a Roth account would trigger a tax event and you would have to pay income tax on the amount you convert. Which makes sense: your traditional contributions are pre-tax, tax-deductible dollars. The IRS never got their tax from it, so now they take it. But that does feel a bit slimy when you consider the BRS bonus matching of 5% could end up more like just 4% after the IRS takes its share. So the key is to try and prevent that by converting when you can do so tax-free.

When you convert, that amount is reported back on your tax return as ordinary income – because you previously deducted it. If you wait 20 years to do this, you could be facing income tax on $200,000 or more and paying a tax of $40-50k! But when you make that conversion early, possibly each year during the last week of December, at least you are only paying tax on the matching funds deposited into your account -- NOT on the investment gains that will also be taxable later if you leave the money sitting there. If you were to simply convert the $2,000-6,000 in matching funds you get each year from the BRS while you are in a 12% tax bracket, this will cost you $240-720 a year in Federal Income Tax. Over 20 years, you may pay $10,000 in tax to do your annual conversion, a massive discount on waiting.

The Military Advantage

Up until 2026, all of this was just a theory – or something to wait for. But now thanks to new laws, the Backdoor Roth Conversion is available to you while on active duty: you just have to do it inside the TSP. That's right, you can now convert your Traditional TSP dollars into Roth TSP dollars every year to make sure your BRS Match money grows tax-free for retirement. This is a deal you cannot afford to miss out on.

And it gets even better. Remember that when you do this the IRS wants to tax that money, and so you normally will receive a 1099R that lists how much money you converted so the IRS can tax you on it. But by being in the military this strategy can be transformed into what you might call the Mega Military Backdoor Roth Conversion, because if you do it in a combat zone you can do it TAX-FREE. . .

Why Is This Strategy So Powerful for Service Members?

While not every overseas assignment is to a combat zone, many are to places that are covered by the Combat Zone Tax Exclusion (CZTE). For any month in which you spend at least one day in a CZTE location, your income for the entire month is tax-free! This will dramatically reduce your income taxes owed on your Base Pay, while also opening windows of opportunity to do your Roth Conversion. Now, you can't do the conversion in the one month of the year that you are in a CZTE and think the IRS will let you get away with it. In that case the tax saved on the excluded income will cancel out the tax paid on the conversion, so it's basically a breakeven situation for you.

But if you're in a qualifying location for at least part of all 12 months, it's a different story. Now 100% of your Base Pay is tax-free, which means you can use your Standard Deduction to cancel out the converted Traditional TSP funds. In 2026, a single tax filer has a $16,100 Standard Deduction and someone who is "married, filing jointly" has a $32,200 Standard Deduction. If your Base Pay is tax-free, you can convert up to that dollar amount from your Traditional TSP and not owe any tax. In fact, if you have children, the Child Tax Credits ($2,200 per child in 2026) can also offset any tax owed on a converted amount. If you have two children and $4,400 in tax credits, and are married, it gets even better:

• Total conversion: $73,000
• Standard Deduction: $32,200 – remaining taxable conversion = $40,800
• 10% Tax Bracket: $0-24,800 = $2,480 in taxes
• 12% Tax Bracket: $24,801-$40,800 ($16,000 taxable) = $1,920 in taxes
• Total taxes = $4,400
• Total Child Credits = $4,400
• Total Tax Owed = $0

What if you don't have that much in your Traditional TSP from matching contributions? In that case, make sure you are making your own Traditional -- not Roth -- TSP contributions in the years prior to your overseas assignment. You can essentially pull off a "triple tax hack" in the military:

• Make Traditional TSP contributions yourself while Stateside, taking tax deductions each year and saving $500-2,500 or more each year you are not deployed. Your taxes are saved in your highest marginal tax bracket, so $10,000 contributed in the 22% tax bracket saves $2,200.
• Complete Mega Backdoor Roth Conversions while deployed, converting that Traditional money that was deducted and saved you taxes in previous years without owing any tax when converted.
• Make Roth TSP contributions while deployed, because that income isn't taxable you don't pay tax up-front -- and you won't have to worry later about paying taxes because it's in your Roth TSP

This "triple hack" has the potential for those service members who are regularly assigned or deployed to qualifying CZTE locations to not just pay zero tax on 100% of their retirement savings, but to actually get higher tax refunds on their TSP contributions. It wouldn't be a stretch to say the IRS is actually paying you to save for retirement! At the very least, it will save you tens of thousands in taxes in your lifetime, and will be able to shield 100% of your retirement savings from taxation in Roth accounts.

Step-by-Step: How to Execute a Mega Backdoor Roth Conversion

Now, let's walk through exactly how to pull this off.

Step 1: Contribute to Your Traditional TSP

Start by contributing to your Traditional TSP (rather than Roth) during years when you're not deployed. The reason for this is simple: Traditional TSP contributions are tax-deductible, meaning you reduce your taxable income in those years.

Step 2: Deploy to a CZTE Location

Coordinate with your unit and detailer/monitor/career planner to request Individual Augment (IA) deployments, or overseas assignments to CZTE areas. (This is best done while you're single!)

Step 3: Convert Traditional TSP funds to Roth TSP

This strategy is most powerful when you're deployed to a CZTE area, where your income is tax-free. During this deployment, convert your Traditional TSP funds to a Roth TSP. Simply log into your TSP dashboard and navigate using the top menu to "Convert To Roth." Follow the on-screen instructions.

But what if you've already separated from the service? What now? If you're already out and still have money in your Traditional TSP, you now have two options. You can still do an in-plan conversion and keep all your money in the TSP. Just login and go to "Convert to Roth." But now that you're no longer on active duty, you can also do a Mega Backdoor Conversion and move all that Traditional money into a Roth IRA. If you are taking a year off after your service to be a student, travel the world, or just rest aching backs and knees, this is the perfect time to do it because it will have the same low- or no-tax structure as a CZTE conversion. And if you do the conversion into a Roth IRA, you'll have many more investment options than the TSP gives you.

TSP Walkthrough of a Backdoor Conversion, aka "Rollover Out"

Figure 1. Log into TSP and select "Rollovers Out" from the top menu.

Figure 2. Choose "Partial Distribution" so you can select to Rollover Out only Traditional funds.

Figure 3. Choose "Qualified Employer Plan" and "Roth IRA" for where TSP will send the funds.

Figures 4 + 5. Choose "All Available" -- you don't want them to send you any cash! Figure 6. Confirm that there is "$0.00" next to "Federal Withholding" (if it isn't, start over).

Figure 7. Enter your Roth IRA account information, and TSP will automatically send the funds!

Figure 8. One last double-check before clicking "Submit."

What To Do If You Can't Deploy or Move to a CZTE Duty Station

Not all branches or communities have easy access to CZTE deployments and assignments. In those cases, you can still offset the dollars of your Mega Backdoor Roth Conversion -- but you'll have to work for it:

• Purchase a Business Vehicle: If you have a side hustle or business, you could use part of the bonus to buy a vehicle that weighs over 6,000 pounds, such as an SUV or truck. By using Section 179 of the tax code, you could deduct the entire cost of the vehicle in the first year, or spread it out over multiple tax years, offsetting any conversion amount from your Traditional TSP.
• Invest in Rental Real Estate: Use another portion of the bonus to purchase a rental property. The expenses of maintaining the property and depreciation are tax-deductible, helping you further offset your tax liability. If you invest in a Short-Term Rental, you'll be able to offset this liability more easily and at a higher level than if you just invest in long-term rental properties.

Key Takeaways

The Backdoor Roth Conversion is an incredible tax strategy that can help military members maximize their retirement savings. By strategically contributing to the Traditional TSP during non-deployment years and converting those funds to Roth retirement savings that are tax-free while deployed to a CZTE area, you can save a substantial amount in taxes. And even if you never contribute a single dollar to your Traditional TSP, all of the service-matching contributions under the Blended Retirement System are Traditional TSP contributions, so you'll have to master this strategy no matter what.

The key is to act early and often, avoid letting your Traditional TSP balance grow too large, and understand the IRS rules around Roth conversions. With the right planning, you can build a tax-free retirement nest egg that sets you up for financial success. We're talking about a strategy that can save or make you tens of thousands of dollars during your career -- so it has to be a "non-negotiable" in your financial playbook.