I don't have much experience with threaded headsets. I bought a bike with one last year and never paid much attention until I recently decided it would be a good idea to replace the bearings and clean and put new grease in. After disassemble and putting it back together I have noticed that I can't tighten the locknut all way down to the Top race. There is always a few threads showing. Is this big deal?

There is a very thin keyed washer above the top race but no spacers. I do have a threadless spacer above the locknut for purely aesthetic reasons because I have a 1 inch to 1 1/8 adapter on it. Even though there are a few threads of the steerer showing I seem to be able to get good preload and I can't loosen the top race without loosening the lock nut first even though they don't make contact

Threads showing where?. It looks tight in the photo, and you don't describe a problem.

If the headset doesn't stay adjusted, remove the adapter and locknut entirely, and compare the height of the steerer to the depth in the locknut up to the stop at the top. If all is right, the locknut would be deeper than what's sticking out so it can't bottom against the top of the steerer.

If the steerer is too long, it might be because this headset has a lower stack height than the original, or that someone along the line removed a spacer, or maybe a reflector bracket or brake cable hanger. No big deal, add a spacer so that the steerer extends only about 7-8mm (less than depth of locknut) and get on with your life.

The way I read it, you didn't replace or change anything except for the bearings, and there wasn't a problem before you took the headset apart.

Is that right?

Is it possible that you used replacement bearings that are smaller than the original bearings, or you installed the wrong number of bearings?

I don't see any threads. I see the keyed washer and the lip on the bottom of the lock nut. Either that or two keyed washers. I see no gap, I see contact.

Looks the same as the one pictured on park's headset removal/installation page.
Park Tool Co. » ParkTool Blog » Threaded Headset Service

Yep. I think I am both crazy and very inexperienced with threaded headset assemblies. What looked like 2 threads from the steerer are in fact the keyed washwer and bottom of lock nut.

I replaced upper and lower bearing with new caged bearings just because the bike is 25 years old and I don't know if they are still original so I figured replacing them for a few bucks and packing fresh grease is a reasonable thing to do...I wasn't necessarily having an issue before. It feels pretty smooth now. I am going to put some miles on it tomorrow and see how it feels on the road

I think you are ready to rock some buttery smooth steering.

Buttery smooth are the exact words I would use. The bike is finally set up perfectly and feeling so great that it makes me question why I have the much more expensive modern carbon bike