Military members are accustomed to significant challenges. Combat tours, deployments, and frequent transfers are a few of the difficulties they face frequently. Because of this stress, many military members experience significant struggles when it comes to getting ahead financially.
Possibly one of the greatest benefits to U.S. government or military service is the Thrift Savings Plan. The Thrift Savings Plan (TSP) is a retirement savings and investment plan offered to current employees of the military and federal government.
Since it’s a “defined contribution” retirement plan, the retirement income you receive from the TSP will depend on how much you (and your agency, if applicable) contribute during your working years--along with how well your investments perform over that time. Though it offers numerous advantages for retirement savings, the TSP is an under-appreciated and under-utilized benefit offered by the federal government.
Being a service member gives you access to investment opportunities that civilians don't. That's a great thing! At the same time, many service members are young and haven't had much formal financial education, so navigating the investment options to invest is tough. Though sometimes confusing, investing early is the key to wealth! I know several retired service members who made it a point to start early. They didn't just rely on their retirement, but also bought rental properties in areas where they were stationed, and invested in taxable accounts. After 20 years, they were set for life.
To start with, the TSP is cheap.
When you make any investment, the investment company is going to take some of your money as a service fee; nobody works for free. The TSP currently charges a service fee of 0.04%, which is probably the lowest you will find anywhere in the world. Even index funds, which some investors swear are the best investments, normally have service fees at least twice as high as the TSP. Most employer-sponsored retirement savings plans are at least three to four times more expensive than the TSP.
The TSP is also a tax advantage. Since the TSP is a tax-deferred or tax-qualified retirement program, you are making a deal with the IRS that you won't use this money until you are close to retiring. In return, the IRS says it won't tax you on a portion of that money. This is one of the big selling points of any retirement savings plan. With traditional TSP contributions, you get a tax break now and pay taxes in retirement. Conversely, you make Roth TSP contributions with after-tax dollars. So, you don't get a tax break now, but the account grows tax-free over the years. Additionally, your withdrawals in retirement are tax-free.
The TSP can be invested in real estate with some conditions. The only option is to use the funds for a residential loan, which is real estate that one is living in as a primary residence. In theory, one could rent out a couple of extra bedrooms, which would be considered an investment. However, if you are still employed, you may be able to transfer some of the TSP funds to an IRA or solo 401k, which both allow for investing in real estate. If you are retired, the entire TSP balance can be transferred.
Borrowing against your TSP contributions can be an easy way to establish a down payment and closing costs for your investment property. The loan is limited to the funds that you have contributed to your TSP account – not matching funds from your agency or service – and any accrued earnings. The loan amount must be between $1,000 and $50,000 and gets repaid at the interest rate for the G Fund at the time of processing. A $50 processing fee gets added to your loan as well.
Interest from a TSP loan gets paid to you – not a commercial lender – and payments can be taken directly out of your paycheck. When you repay your loan, you repay it with interest. The repayment amount gets deposited back into your TSP account and is invested according to your most recent contribution allocation. There's also the option to amortize the loan as needed to change repayment details like extending the payback period for up to 15 years-- which tweaks the number of payments or adjusts its amount.
Loan payments are paid proportionally from your traditional and Roth balances, and from each TSP fund in which you have investments. Applying for a TSP loan is easy and there are no denials as long as there's sufficient money in your account. If you default on your TSP loan, your credit isn't affected-- because although the remaining balance becomes taxable income, the default isn't reported to credit bureaus. Before taking out a TSP loan, be sure you're not sacrificing your long-term retirement goals by doing so. There are possible financial ramifications to TSP loans, including having to postpone retirement to replenish your nest egg. TSP accounts grow through contributions and compounded interest both of which are reduced by loans taken out against them. It is always recommended to speak to a financial counselor before taking out a TSP loan.
When you're underwriting potential deals, include the payment from your TSP loan in the cash flow analysis and budget ahead of time for the payroll deduction. If it still makes sense for you after all expenses including the loan repayment, it can be an amazing opportunity to fund your investment properties.