Category: Investing

Top 7 FAQs for Military Real Estate Investing

Post author By Paul Allen, CFP®, MQFP®
Post date November 27, 2020

Understanding Real Estate Investing for Military

There are numerous ways to engage in real estate investing. There’s flipping, commercial offices, wholesaling, investing in notes, and the most popular among military families – residential rentals. Becoming a landlord may be the most popular form of real estate investing for military families by default. With steady incomes and incentives to buy houses heaped on service members, many become homeowners. When you own a house and receive military orders to another city your choices are limited. You either sell it, or you turn it into a rental property. Whether by plan or by fate, becoming a landlord is a solution often chosen.

Real estate investing also has a natural appeal to many military folks. Military families are do-it-yourself, ‘bootstrap’ people. There’s an air of self-determination around real estate investing. A sense that you are more in control of your destiny with real estate than you are with traditional investments.

Initiative and hard work seem like they can be turned into profit with a property on Main Street in a way that can not be realized with securities on Wall Street. Financial professionals describe it as inefficiencies in the real estate market that can be profitably exploited. I believe it is true, although more difficult to master than it seems.

The major obstacle to getting started in real estate investing is typically the initial cost. You can get started in TSP for 1% of your paycheck. With an app like Acorns you can open a brokerage account with your spare change.

To get into real estate investing takes capital, often tens of thousands of dollars of capital. It’s a big commitment.

Big financial commitments generate questions. Access to VA loans and other programs lowers the barriers to entry into real estate investing, but most military families have at least one member with enough sense to know you don’t spew cash at an idea like becoming a landlord without looking a little before you leap. I am asked about it frequently.

Following is a list of the seven most common questions I am asked by people who are contemplating investing in residential real estate rentals. Each of them probably merits its own article, but I’ll try to give you some useful short answers here.

Is real estate a good investment?

Let me break this news to you gently; it’s not about the real estate, it’s about you. Money can be made in real estate investing, but the path to it isn’t for everyone. In addition to technical know-how, a successful investor must have the ability to avoid frustration and derailment when people disappoint you. Because in residential rental real estate you have to deal with people, and people disappoint.

Sooner or later you will discover some tenants are vandals, some property managers are lazy idiots, and some contractors are thieves. If you believe the hype I see all over the internet about how easy it is to make money in real estate, you should not invest in real estate.

The successful landlords I know are hustling every day for their profits. The rest are trying to get back to even.

What are the tax benefits of real estate investing?

With respect to being a landlord, OWNING rental properties can have many tax benefits. SELLING rental properties usually has significant (and painful) tax consequences. Landlords are business owners. They own and operate residential real estate for the purposes of collecting rents.

The biggest expenditure in such a business is the cost of the property being let to the tenant(s). As a business owner, you can recover the cost of the buildings on your property by deducting them from your taxes over the lifetime of the building. This cost recovery process is known as ‘depreciation’, and its effects can make a tremendous impact to your bottom line while you own the building. However, if you sell the property you will likely owe the IRS for all the depreciation previously claimed on the building.

In addition to depreciation you can deduct all the ordinary and necessary operating expenses of a business. There are numerous ways to take advantage of this situation, but none of them will turn a bad investment into a good investment.

If you are thinking about getting into real estate investing do so because you want to make money from the investments and then take advantage of the tax benefits to maximize your profits. DO NOT get into real estate investing with the primary motive of reducing your taxes.

Why don’t financial advisors give real estate investing advice?

First – a few of us do. But, I get it. We are so difficult to find as to be indistinguishable from non-existent. Take heart, our numbers are growing! The primary reason there are so few of us is related to how the financial planning field evolved.

Financial planning, so the story goes, was the love child of a few insurance salesmen and stock brokers trying to do the right thing. All the first generation planners came from one of those two fields. You sold insurance and did financial planning or your sold stocks and did financial planning. Nobody sold real estate and did financial planning. The second generation of financial planners were nearly all “investment managers”. They took a piece of the action (a percentage) of all the assets they could gather and manage. Still no real estate.

The third wave is coming. In this wave we take a more holistic approach to financial planning. Some are even calling it ‘life planning’. Some advisors have observed that in life many people invest in real estate, so we are starting to include it in the plans we build with our clients. We are mostly self-taught, though. For example, the inclusion of real assets in a portfolio is not covered in the CFP (R) curriculum. (I am working to get that changed, btw.)

Should I form an LLC for my rental property?

Many people believe you must have your houses in an LLC to qualify for certain tax benefits. This is not true. There are no tax benefits to placing your rental properties in an LLC.

Zero.

None.

Your rental property business is a business whether it is within an LLC or not. Your ability to deduct business expenses is not impacted by forming an LLC.

There may be legal considerations for forming an LLC in terms of limiting your liability. That is a question for a lawyer. I am licensed to give tax advice. I am not licensed to give legal advice.

When is the best time to sell my rental property?

In terms of tax strategy – never. As I wrote above, OWNING rental properties can have significant tax benefits. SELLING rental properties frequently turns those significant benefits into significant burdens.

In many cases the most efficient tax strategy for rental properties is probate. When you die owning depreciated property your heirs inherit it with a cost basis reset to current market value. The tax burden is transferred to the government and is no longer a problem for you or your family.

If you absolutely must get rid of the property, then the second-best time to sell is likely today. The tax burden on the property is most likely going to grow over time, so getting rid of it now is like ripping off the band-aid. Just get it over with.

That said, every case is different. You should have a tax professional knowledgeable in real estate issues evaluate your situation before you act.

How does the ten-year extension for military people work?

Home sellers can exclude a significant amount of capital gain (frequently all the capital gain) from the sale of their primary residence as long as they meet certain guidelines. The short version of how to qualify for that exclusion is called the ‘2-in-5’ rule. You must live in the house for 2 of the 5 years immediately prior to the sale. There are additional rules, but those are the basics. That means you could move out of your house and turn it into a rental property for up to 3 years, then sell it, and still qualify for the exclusion from capital gains. (Because in the 5 years immediately preceding the sale you lived in the house for at least 2 of them.)

Military families receive up to an additional 10 years to this ‘2-in-5’ rule if they were moved more than 50 miles from the residence on military orders. This means military families could live in a house for 2 years, take a PCS move to another state, turn the house into a rental property and sell it up to 13 years later AND still qualify for the capital gains exclusion. It’s a pretty nifty benefit!

A related question I frequently get is ‘how long do we have if the military member retires while living at the other duty station?’. The answer is that once the service member retires the extended period stops. Military families receive UP TO 10 years. When you retire your extension stops and you essentially have 3 years from the retirement date to sell the property before you will have to pay capital gains on the sale.

My depreciation is wrong on my prior tax returns, how do I fix it?

The short answer is to hire a professional to do it for you.

The medium answer is that you can only fix a depreciation issue by amending returns if it was wrong on only one filed return. Once it’s been wrong on two filed tax returns you must submit an application to the IRS to change your method of accounting. This is done on form 3115, and it is a very complicated form. On the last page of the instruction book for form 3115 it estimates that it takes more than 36 hours to learn and prepare form 3115.

Save your time, hire a professional. If you prepared your own tax return and you didn’t get the depreciation right, then it is unlikely you will get form 3115 right.

The outcome of filing the form 3115 depends on how your depreciation was wrong. If you had been under depreciating the property, then you would get an adjustment allowing you to take a one-time additional beneficial depreciation adjustment on your tax return. (You get to claim an additional expense that year.)

If you had been over depreciating the property then you also get to take a depreciation adjustment to your tax return, but you won’t like it as much. The amount of over depreciation gets declared as additional income that year and you must pay tax on it. There are some strategy elements regarding the timing of these adjustments, so you should consult a tax professional knowledgeable in real estate investing before you act.

The Bottom Line

Real estate investing can be financially and emotionally satisfying when done well. At Redeployment Wealth Strategies we have some military families who are profiting nicely with their real estate investments. Unfortunately, we have a larger number of clients who got on that real estate investing highway before they thoroughly researched their situation, and now they’re looking for the off-ramp.

We urge you to carefully consider whether real estate investing is right for you before you make that large capital commitment to participate. Learning the hard way can be very expensive.

As financial advisors, members of the MFAA help people just like you navigate the questions, challenges, and planning opportunities related to investing in real estate. We would love to be of help and have a free consultation.

Find an advisor here!

Financial Planning Investing Savings Taxes

Do Military Families Really Need a Financial Planner?

Post author By Paul Allen, CFP®, MQFP®
Post date October 2, 2020

Do Military Families Really Need a Financial Planner?

I am frequently asked some form of this question, and my short answer is, “Yes, military families need a financial planner.” You may think I believe military families need a financial planner because I am a financial planner. And while I would never turn away a new prospective client, my reasoning might be even sneakier than you think!

Every military family needs someone to do the things a financial planner does. These include, but aren’t limited to:

Develop specific and measurable financial goals consistent with their values
Develop saving, spending, investing, and tax strategies to efficiently meet those goals.
Develop risk mitigation strategies for the unexpected: 1) Insurance against loss of income; 2) Insurance against catastrophic loss; 3) Contingencies to reach plan goals even if the planner isn’t there to see it
Accountability to execute the steps of the plan
Establish efficient asset transfer when the plan has ended
Periodic review and update the plan as life happens

It is not always necessary to outsource those duties to a professional financial planner. The person performing those tasks can be a family member. There is an endless supply of free information about financial planning on the internet. Much of it is good enough to help individuals do a creditable job managing their family’s financial plan. If you do it yourself, the price is right, there are no issues of trust, and (you don’t need to tell me) financial planning can be fun!

Therefore, my sneaky response that every military family needs a financial planner is just me having a bit of word fun.

You need a financial planner. You just don’t need to hire one if you’re willing to do the work yourself. However, even if you’re willing to be your own financial planner, you might still want to hire one. Here are a few reasons why.

You Prefer to Pay for the Service

I know how to change the oil in my truck. I can change the oil in my truck for less than it costs me to pay someone else to do it. When I was a young sailor, I used to get under my vehicles every 5,000 miles and change the oil and the filter. I’m 55 now, and I’m not crawling under that truck ever again. There are hundreds of things I’d rather do.

Likewise, you can be your own financial planner. You can read and study on personal finances to stay abreast of the trends, opportunities, and ever-changing tax laws. You can burn a Saturday or two each year reviewing your overall financial situation and making some tweaks to your plan to keep it on track. Or, you can hire someone else to do it and go and do hundreds of things you’d rather do.

Professional Financial Advisors have Greater Objectivity about Your Money

There used to be a fellow on public radio named Garrison Keillor. He told humorous stories about his hometown where “all the women are strong, all the men are good looking, and all the children are above average.” The joke is that only the people from that town believe in their superiority – and they believe it because their emotional attachment to their town causes them to lose their objectivity.

The same is true for people and their money. Money evokes strong emotions in people. (Not having money evokes even stronger emotions!) I’ve too often seen successful, well-adjusted people make emotionally-fueled decisions when the markets are gyrating like they were when the pandemic first hit. It can be helpful to have a professional advisor take a more objective view of your finances when the ride gets bumpy.

There’s Something to Be Said for Experience

Have you ever been the licensed passenger with a teen and a new permit? That’s some white-knuckle fun! They kinda know what they are doing, but they don’t know what they don’t know. They haven’t seen things like the car beside them changing lanes without signaling, or an emergency vehicle trying to make a left in front of them, or a gaggle of bicyclists blowing through stop signs. You have seen things like this; hence, the white knuckles!

If you are your own financial planner, then you are a bit like that teenager. You may have studied diligently and learned many things, but you don’t know what you don’t know. You may have studied for many hours, but you’ve only ever seen one financial plan – yours! Professional financial planners have seen hundreds of financial plans. They’ve seen rental homes, student loans, SBP, and tax law changes. They’ve dealt with the things you’re dealing with, and that experience can be useful.

Financial Advisors can Provide Continuity

“Jim” was adept at personal finance. After his military career, he worked in management for a Fortune 500 company. He amassed a portfolio of stock and real estate worth more than $2 million. My very first client was his widow. I was volunteering at a free financial clinic. She was literally the first person I ever tried to advise. She came to the financial clinic because she wanted to learn how to handle money. Jim had always taken care of it when they were married, and she had no clue what to do. When I first met her she was inhabiting only the upstairs of her house because the downstairs zone heater was broken and she didn’t know how to get the money to have it repaired. She was working in the lunchroom of the public school to have money to pay for her daughter’s tuition. She had $2 million, but she was living like a pauper because she was scared to death to access the assets for fear she would screw up something.

I envisioned Jim looking down from Heaven with his face in his palm. There was no way this is what he intended. If they had worked with a financial advisor while Jim was still alive, they could have had a plan to deal with him unexpectedly passing. A plan that kept the heat on and the tuition money flowing without his widow slinging hash in the school lunchroom. A plan that provided simple peace of mind.

Military families do need a financial planner, and the first step in that plan is who will orchestrate it. An individual family member can take on the responsibility of making sure all the required elements of the financial plan are accomplished, but a military family may want to hire a professional financial planner. If they do, we hope they first consider a member of the Military Financial Advisors Association. We believe the education, experience, and fiduciary standards we require of our members are exactly what military families deserve.

Contact one of our advisors to learn more with a free consultation

Browse MFAA profiles

Investing TSP

TSP Lifecycle Fund Changes

Post author By Katie Cannon, CFP®
Post date June 16, 2020

What’s the Deal with TSP L Funds and their new updates?

Unicycles, bicycles, lifecycles – The Thrift Savings Plan (TSP) Lifecycle (L) Funds are evolving again. Beginning on July 1, 2020 the L Funds are going through some changes. Here’s the lowdown on what the L Funds are, how they are changing, and a bonus benefit you might not have considered.

TSP has core funds and lifecycle funds you can invest in. The five core funds are:

Government Securities Investment (G) Fund – invests in short-term U.S. Treasury bonds.
Fixed Income Index Investment (F) Fund invests in government, corporate, and mortgage-backed U.S. bonds.
Common Stock Index (C) Fund – invests in large companies that trade on U.S. Stock Exchanges.
The Small Capitalization Stock Index Investment (S) Fund is invested in small to medium-sized US companies not included in the C Fund.
International Stock Index Investment (I) Fund invests in international stocks of more than 20 developed countries.

Each of the TSP L Funds, sometimes called target date funds, are designed to meet your needs based on when you plan to tap your TSP retirement savings. If you plan to start spending your TSP savings starting in 2030, the L 2030 Fund is designed for you. You can choose whichever L Fund that matches your situation. New servicemembers in the Blended Retirement System that do not make a choice will automatically be put in an L Fund based on their age.

When choosing an L Fund year, pick a fund target date that matches the year you plan to start spending your TSP savings. This will most likely NOT be the year you could retire from the military. In most cases, if you draw from TSP before age 59 ½ you will pay a 10% penalty. Very few servicemembers will be allowed to serve long enough to retire after that age. Your fund target date maybe the year you plan to finish second career or when you become eligible for Social Security in your mid-sixties.

Each L Fund is made up of the five core TSP Funds—G, F, C, S, and I—in different proportions. The L Funds are target date funds, meaning the proportions of the core funds in each L Fund automatically adjust (also called a “glidepath”) as you get closer to the year you plan to retire (your target date). The L Funds are set up based on the idea that when your retirement is far in the future, you can take more risk (market ups and downs), while seeking greater reward (higher growth in value). You have time to recover from any market downturns before you’ll need your money. When your target date is close, you may want to be more conservative (lower risk, lower rewards) with your investments.

To make the gradual adjustment from riskier to more conservative investments on your own, you can regularly shift some of the money in your TSP account from the more aggressive C, S, and I Funds to the more conservative G and F Funds as you approach retirement. The beauty of the L Funds is that TSP does all that work for you, it’s “fire and forget”.

What is changing?

More choices! TSP is introducing six new L Funds to the lineup.

Right now there are four L Funds in ten-year increments – L 2020, L 2030, L 2040, L 2050 and the L Income Fund. When a target year arrives, it is rolled into the L Income Fund, the most conservative L Fund designed for your retirement years. So, July 1, 2020, the L 2020 is being retired. On that date TSP is also adding five new funds: L 2025, L 2035, L 2045, L 2055, L 2060, and L 2065. The five-year intervals give you more options to more closely match your investment time line. Also, the new L 2055, L 2060, and L 2065 are designed for our youngest servicemembers with long saving horizons.

As you can see in this chart, L 2065, L 2060, L 2055 will be invested 99% in higher risk/higher reward stocks (C,S,I Funds) and just 1% in less risky/lower reward bonds (G and F Funds). L Funds with sooner target dates have less risk. The L 2025 Fund will be invested in 50% stocks (C,S,I Funds) and 50% bonds (G and F Funds). Each month, TSP adjusts the proportions of each L Fund to gradually become less risky as the target date approaches. For example, the investment proportions of the L 2050 Fund will gradually change over time so that in 20 years it will look like the L 2030 Fund in the chart above.

More aggressive. In the past, the TSP L Funds were sometime criticized for being too conservative compared with outside target date funds and didn’t consider service members may also get a pension. In response, beginning July 1, 2020 all the TSP L Funds proportions will gradually change to invest a bit more in stocks (C, S, I Funds) and a bit less in bonds (G and F Funds). The percentage of stocks in the L Income Fund will gradually rise from 20% to 30% over a 10-year period. For the funds in between L 2055 and L Income, the stock allocations will not increase on July 1, 2020, but they will be frozen until they eventually come in line with the glide path planned for the newest L Funds.

More international. Starting April of this year, all the L Funds now have a slightly higher allocation of international stocks (I Fund) than they used to. One planned change to include stocks from less developed (emerging market) countries in the TSP I Fund had been put on hold. Watch for more news on that later this year.

Bonus L Fund Benefits

Hands-off rebalancing. Another great feature of the L Funds is that by design they are constantly taking advantage of changes in the market to buy low and sell high. As we’ve already seen, each L Fund has a certain target proportion of the five core TSP Funds. As markets go up and down, the value of each core fund changes. For example, this year when markets initially reacted to the Coronavirus, the C, S, I Funds’ values dropped significantly, while the G and F Funds held pretty steady. In order for the L Funds to maintain their target proportions, the L Funds had to sell some G and F Fund bonds to buy the now lower priced C, S, I Fund stocks.

A few months later, when the markets went back up, they sold back some of the C, S, I Fund stocks at a profit and put that money back into G and F Fund bonds. This is known as “rebalancing”. The TSP L Funds make these buy and sell adjustments every day. Over time this maintains the funds target riskiness (proportions of the core funds), while earning a higher return than if they had just bought once and held those investments. If you own just the core TSP Funds, you can log into TSP and do your own rebalancing. But you can only rebalance among all the funds two times a month. The L Funds do this for you every day, hands off.

Overall, TSP L Funds are a great choice for anyone who just wants to choose a plan once and let the TSP experts do all the work. Decide what year you think you will begin spending your retirement savings and choose an L Fund closest to that year. If your plans change or you decide you want to be more hand-on, you can log on and make changes to your TSP anytime.

Do you have questions or wonder how best to optimize your TSP? Contact one of our advisors to maximize your retirement savings!

Contact an Advisor

Tags TSP

Investing TSP

Military Thrift Savings Plan Essentials

Post author By Katie Cannon, CFP®
Post date June 5, 2020

Understanding the military thrift savings plan essentials

The Thrift Savings Plan (TSP) is the government long-term retirement savings and investment plan, similar to a civilian 401(k). Together TSP, Social Security, and military pension make up the three pillars of the military retirement system. Service members can make voluntary contributions to TSP through automatic payroll deductions. If you are in the Blended Retirement System (BRS), you will receive contributions paid by the military into your TSP account as well. These contributions are invested for you and are intended (but not guaranteed) to grow over time and provide you with income in retirement.

Contribute

Service Contributions – BRS members (only) receive an automatic contribution by the military to their TSP account every month equal to 1% of your basic pay, regardless of whether you make any contributions yourself or not. This money becomes yours (vested) after two years in the service.

Payroll deduction – BRS members who began or rejoined service on January 1, 2018 or later are automatically enrolled in TSP. 3% of your basic pay is automatically deducted from your paycheck every month and deposited in your TSP account. You can change your contribution if you want. Everyone else must proactively elect their own TSP contributions. For 2020 you can contribute up to $19,500 to your TSP. Service members age 50 or older can make an additional $6,500 Catch Up contribution each year.

Service Matches – BRS members (only) also receive matching contributions (additions to your TSP account) on the first 5% of the pay you contribute each month.

TSP Essentials Tip – Steady Wins the Prize. Matching contributions for BSR members are made month-to-month. If you elect to make large payroll contributions int the beginning of the year and hit the annual limit early, you could lose out on matching contributions later in the year. Consider spreading your payroll contributions out evenly to the end of the year to get all your due.

TSP Essentials Tip – Don’t Leave Money on the Table. BRS members should consider increasing your contributions to at least 5% so you get the full-service match.

Pay Taxes – Or Not

There are two kinds of TSP accounts, Traditional and ROTH. Services will make the automatic and matching contributions for BSR members to their Traditional TSP account. You can choose to make your contributions to a Traditional or ROTH TSP account. The main difference between the two is how they are taxed.

Traditional TSP -Traditional TSP contributions that you make reduce your taxable income, so the amount of taxes that come out of your paycheck now are less. When you withdraw money from TSP, usually in retirement, the entire amount (contributions and investment earnings) is taxable as regular income. For many people their tax rate in retirement will be less than when they’re working and they would pay less taxes overall with a Traditional TSP.

ROTH TSP – With ROTH TSP you pay taxes now on your contributions just like regular income. But when you withdraw money from your ROTH TSP it is completely tax-free (including earnings) as long as it’s withdrawn at least five years after your initial Roth contribution and you are at least 59 1/2 years old, permanently disabled, or deceased.

Tax-exempt contributions – Contributions you make to Traditional TSP while earning tax-exempt pay in a combat zone are not taxed when you make the contribution or when you withdraw it. However, the earnings that grow in your Traditional TSP will be taxed as normal income when you withdraw it. For contributions you may make to a ROTH TSP with tax-exempt pay, the contributions AND the earnings are completely tax-free as long as you meet the withdrawal requirements in the ROTH TSP paragraph. Servicemembers 50 and older can make catch-up contributions with tax-exempt pay only to a ROTH TSP. Catch-up contributions to a Traditional TSP cannot be made with tax-exempt pay.

TSP Essentials Tip – Pay Now, Pay Less. Service members with lower income, such as early in your career, should consider making ROTH TSP contributions. If your tax bracket is lower now than when you retire, you will pay less tax in total with the ROTH.

TSP Essentials Tip – Pay No Tax. You should consider making your TSP contributions to ROTH TSP while you’re deployed to a combat zone. As long as you meet the ROTH withdrawal requirements (59 ½ and 5 years), both the contributions you make to ROTH TSP with tax-exempt pay and the earnings that grow over the years are not taxed. Ever.

Invest Two Ways

TSP offers you two ways to invest your money. The first way is with “Lifecycle” L Funds. These funds are a professionally designed mix of stocks, bonds, and government securities. You select your L Fund based on your “target date,” the year in the future that you plan to start withdrawing your money. Depending upon your plans, this may be as soon as you leave the service or further in the future. The second way is to invest in individual TSP funds. This way you make your own decisions about your investment mix by choosing from any or all of the individual TSP investment funds (G, F, C, S, and I Funds).

When you start TSP contributions, you designate which TSP Funds you want your contribution to go to. If you are a BRS member and do not make a selection, all contributions TSP receives for you will go into an L Fund appropriate for your age.

L Funds – Your target year is when you will expect to start withdrawing money from TSP. For example, the TSP Fund L 2040 has a target year of 2040 and is designed for those who will begin withdrawals in years 2035 through 2044. L Funds assume that if you who won’t need your money for quite a long time, you are able to tolerate more risk (ups and downs) while seeking an overall higher return (increase in value).

The L Funds invest in mix of individual TSP investment Funds (G, F, C, S, and I Funds) and automatically adjust the mix to reduce risk (and returns) as you get closer to your target year. If the target year is a long time from now, that L Fund will be more exposed to risky assets, such as stocks in the C, S, and I Funds. The L Income Fund is designed for those who are already withdrawing from TSP and offers lower risk and lower growth. As the value of stocks and bonds go up and down, each of the L Funds is automatically rebalanced to restore its intended investment mix. In practice this rebalancing forces the L Funds to “buy low and sell high” for you each business day, boosting your return and while maintaining the same level of risk.

TSP Essentials Tip – Rebalance. For those of you in L Funds your set, TSP rebalances for you. If you choose to invest in the individual TSP Funds, you can rebalance among any of the TSP funds yourself up to 2 times a month. Determine what target percentage of each fund you want to maintain, then periodically log into TSP and do an inter-fund transfer by typing in your target percentages.

Individual Funds – TSP has five individual funds you can invest your TSP dollars in. The Government Securities Investment (G) Fund is invested in short-term U.S. Treasury securities. This is the only fund that guarantees you will not lose money. Your contributions (principal) and interest are guaranteed by the U.S. Government. The trade-off is the growth in value will be quite low and might not keep up with inflation.

Each of the other four individual funds (F, C, S, and I Funds) are invested to track separate market indexes. For example, the Common Stock Index (C) Fund seeks to invest in the same stocks as the Standard & Poors (S&P 500) Stock Index. This index includes 500 large companies that trade on U.S. Stock Exchanges. One dollar you invest in the C Fund buys you a tiny portion of each of those large companies. This helps reduce (but not eliminate) your overall risk by diversification, that is “putting your eggs” in many, many baskets.

The Small Capitalization Stock Index Investment (S) Fund is invested in small to medium-sized US companies not included in the C Fund, and tracks the Dow Jones U.S. Completion Total Stock Market (TSM) Index. The International Stock Index Investment (I) Fund invests in international stocks of more than 20 developed countries and tracks the MSCI EAFE (Europe, Australasia, Far East) Index. The Fixed Income Index Investment (F) Fund invests in a government, corporate, and mortgage-backed bonds U.S. Bonds and tracks the Bloomberg Barclays U.S. Aggregate Bond Index.

TSP Essentials Tip – All L Fund or None. The L Funds are already made up of the five individual TSP funds (G, F, C, S, and I Funds), so you will duplicate your investments if you invest in an L Fund and the individual TSP funds at the same time. Consider choosing only an L Fund for simplicity and hands-off investing, or build and mange your own custom portfolio from among the other G, F, C, S, and I Funds.

TSP Essentials Tip – Early Bird Gets the Worm. Making and maintaining investment choices can seem intimidating. Don’t let that keep you from getting started. You can start now with an L Fund, let the pros work it for you, and start watching your nest egg grow. As your knowledge and confidence grows, you can always make changes and take more control if you want to.

Withdrawals

Retirement – TSP is a qualified retirement plan designed for long-term saving for retirement. You will be able to make retirement withdrawals from TSP once you reach age 59 ½. Generally, if you withdraw money before that time, you will be hit with a 10% penalty, in addition to any taxes due. When you are eligible, you will be offered a choice of regular “installment” payments from your balance, a single lump-sum payment, or purchasing an annuity that guarantees a set monthly benefit for life to you (or your survivor).

In-service – There are two types of withdrawals you can make while you are still in the service, financial hardship and age based “59 ½”. You can make a financial hardship withdrawal if you
can certify you have a financial hardship as a result of a recurring negative cashflow, legal expenses for separation or divorce, medical expenses, or a personal casualty loss. You can only withdraw contributions you made and earnings on those contributions. You can request $1,000 or more; but, the amount cannot exceed the actual amount of your certified financial hardship.
You can make age-based in-service withdrawals any time after you reach age 59½. You can withdraw it all, or part of your account balance up to four times per calendar year.

TSP Essentials Tip – Don’t Eat Your Seed Corn. Early TSP withdrawals can have steep penalties and taxes due. Even penalty-free withdrawals permanently deplete your retirement savings and any future earnings those saving would have made. Consider building an emergency fund and separate accounts for short-term savings that you can tap when you need it. Then your retirement savings will still be there when you need it.

Loans – You can borrow up to $50,000 of your contributions from your TSP account while you are still in the service. There is a $50 processing fee and most loans must be paid back with interest within 5 years. You can get up to 15 years to pay back a loan for a primary residence. If you don’t pay your TSP loan back on time, there will be a 10% withdrawal penalty and the IRS will charge you income tax.

End Note

It’s never too early to start saving for retirement. The key to growing a mighty oak from a seed? Time. Even small amounts put away now will have a major impact on your financial future. Start by tracking your income and expenses, making a spending/saving plan (budget), and then carving out some TSP contributions to seed your future.

One “Final” TSP Essentials Tip – Name a Beneficiary. A beneficiary is the person (or people) that will receive your TSP funds when you die. If you have not designated someone as your beneficiary for your TSP, government law determines who gets it. You can designate the beneficiary you want with TSP, just be sure to update it with life changes like a marriage or divorce.

For more information on TSP, go to www.tsp.gov