How to Use a TSP to Invest in Real Estate

Military members are accustomed to major challenges. Combat tours, deployments, and constant transfers are a few of the challenges they experience often. As a result of this stress, a lot of military members experience significant struggles when it comes to getting ahead financially.

Perhaps one of the greatest benefits to the U.S. government or military service is the Thrift Savings Plan. The Thrift Savings Plan (TSP) is a retirement saving and investment plan offered to current members of the military and federal government.

Because it’s a “defined contribution” retirement plan, the retirement income you get 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 do over that time. Though it offers numerous benefits for retirement savings, the TSP is an under-appreciated and under-utilized benefit offered by the federal government.

Being a service member grants you access to investment opportunities that civilians don’t. That’s a great thing! At the same time, many service members are young and have not had much formal financial education, so navigating the investment options to invest is hard. Though at times confusing, investing early is the key to wealth! I know several retired service members that made it a point to start early. They didn’t just depend on their retirement, but also purchased rental properties in areas where they were stationed, and invested in taxable accounts. After 20 years, they were set for life.

Why TSP to Invest in Real Estate?

To start with, the TSP is cheap.

When you make any investment, the investment firm is going to take some of your money as a service fee; no one works for free. The TSP currently charges a service fee of 0.04%, which is perhaps the lowest you will find anywhere in the world. Even index funds, which some investors swear are the best investments, typically 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 benefit. Because the TSP is a tax-deferred or tax-qualified retirement program, you are making a deal with the IRS that you will not use this money until you are close to retiring. In return, the IRS claims it will not tax you on a portion of that money. This is one of the major 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 becomes tax-free over the years. Furthermore, your withdrawals in retirement are tax-free.

Can a Real Estate Investment Be Funded Using a TSP?

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 a person is living in as a primary residence. In theory, one could rent out a couple of extra rooms, which would be considered an investment. However, if you are still employed, you might have the ability 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 whole TSP balance can be transferred.

Using Your Funds to Buy an Investment Property

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 restricted 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 has to be between $1,000 and $50,000 and gets paid back at the interest rate for the G Fund at the time of processing. A $50 processing fee gets added to your loan as well.

Benefits of Purchasing 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 latest contribution allocation. There’s also the option to amortize the loan as needed to change repayment details like extending the repayment period for up to 15 years– which adjusts the number of payments or changes 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– since although the remaining balance turns into taxable income, the default isn’t reported to credit bureaus. Prior to taking out a TSP loan, be sure you’re not giving up your long-term retirement goals by doing so. There are possible financial ramifications to TSP loans, including having to postpone retirement to replenish your savings. TSP accounts expand through contributions and compounded interest both of which are reduced by loans taken out against them. It is always advised to speak to a financial counselor before taking out a TSP loan.

When you’re underwriting possible deals, include the payment from your TSP loan in the cash flow analysis and budget in advance for the payroll deduction. If it still makes sense for you after all expenses including the loan repayment, it can be an incredible opportunity to finance your investment properties.

With Mission First Capital, you can start your investment journey alongside other military members and veterans! If you have questions or would like to talk about potential partnerships or investment opportunities, don’t hesitate to reach out. Give us a call at +1 (844) 632-3863 or visit our website MissionFirstCapital.com to learn more and let’s invest today!