How to use a TSP to invest in Real Estate?

Military members are accustomed to significant challenges. Combat tours, deployments, and frequent transfers are just a few of the difficulties they face on a frequent basis. Perhaps because of this stress, many military members experience significant struggle 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 (also known as the 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 under-appreciated and may be the most under-utilized benefit offered by the federal government.

Being a service member gives you access to investment opportunities that civilians don't get. That's a great thing! But at the same time, it can be really confusing and hard to understand. Combine that with that fact that so many service members are young, haven't had much in the way of formal financial education, navigating the investment options to invest are tough. But at the same time, investing early is the key to wealth! I know quite a few retired service members who made it a point to start early - they wouldn't just rely on their retirement, but also would buy rental properties in areas where they were stationed, and invest in taxable accounts. After 20 years, they were set for life.

But why TSP?

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 is.

Another reason to keep the TSP is the tax advantage. Since the TSP is a tax-deferred or tax-qualified retirement program, you are basically making a deal with the IRS saying you won't use this money until you are close to retiring. For its part, 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. And your withdrawals in retirement are tax-free, as well.

However the most important question is whether we can fund a real estate investment using TSP? Is this allowed? Are there certain types of transactions that are allowed or not allowed? (i.e. you can buy and investment property with a TSP loan but you cannot finance a rehab, etc).

The TSP can be invested in real estate since the TSP administrator does allow for it 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 fund to an IRA or solo 401k which both allow for investing in real estate. If you are no longer working, the entire TSP balance can be transferred. Further VA loans, which allows veterans to purchase properties with no down payment cannot be used for investment properties or second homes. Hence TSP provides an added advantage in this regard.

Using Your Funds to Buy an Investment Property

Borrowing against your TSP contributions can be an easy way to come up with 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 onto your loan as well.

Benefits of Buying an Investment Property with TSP

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, tweaking the number of payments or adjusting its amount.

How does a TSP loan work?

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 that's been reduced by such loans. TSP accounts grow through contributions and compounded interest, both of which are reduced by loans taken out against them. Depending on the size of your TSP loan, consider speaking to a financial counselor before actually taking one out.

When you're underwriting potential deals, just be sure and include the payment from your TSP loan in the cash flow analysis, or be sure and budget ahead of time for the payroll reduction. If it still makes sense for you after all expenses including the loan repayment, you can go for it.