Rich on Money

TSP Modernization Act – New Withdrawal Rules

By

On September 22, 2019

In Real Estate

With the TSP Modernization Act going into effect on September 15, 2019, there are new withdrawal rules.  These expanded options greatly enhance your ability to access your money both before and after you are eligible for tax and penalty-free withdrawals. 

The major changes are:

  • Choose if your withdrawals come from traditional, Roth, or both balances
  • Up to four in-service withdrawals per year
  • Multiple post-separation partial withdrawals
  • No longer must make a full withdrawal at 70 ½.
  • Can take monthly, quarterly, or annual payments and make changes to it anytime

 These are a summary of the big changes, but there is plenty more to know about each one of these and how to fully take advantage of them.  We will do a deeper dive into each topic and add some more info on new withdrawal options from the TSP Modernization Act.

Here is a pamphlet on a summary of the changes from the TSP.gov website.

tsp modernization act new withdrawal options

Withdrawing from Traditional, Roth, or Both

Old Rule

Before these changes, whenever you made a withdrawal from your TSP, it came out of both your Roth and your traditional balances proportionally.

What that means is, if 25% of your total balance was in your traditional TSP, when you took a $1000 withdrawal, 25% of that, or $250, would be from your traditional TSP balance, and the other $750 from Roth TSP.

These both are treated different for tax reasons.  If you withdrew this after separating from federal service and after 59 ½ years old, the $250 from traditional would be taxable income.  The $750 from your Roth TSP would not be taxable income. 

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va loan investing no money down

Investing with VA Loans – A Complete Guide

By

On September 19, 2019

In Debt, Investing, Real Estate

This post was originally published on August 8, 2018.  I updated, lengthened, and added a table of contents to it.

Investing in rental property with VA Loan is a tricky subject.  There are many rules that dictate how a VA should be used.  Investing with a VA loan, even in multi-family, is possible.  I will show you how to do it so you can get rental income.

The VA doesn’t say you can use the VA loan for investing, but if you understand the rules, and buy properties as you move from assignment to assignment in the military, it is possible.

You can’t just buy a home and make it a rental property without living in it first.  There is an occupancy rule I’ll be discussing.

You can, however, buy a house at your current assignment using your VA benefit, live in it for a short period of time, turn it into a rental property when you leave, and buy a house at your next assignment with a VA loan repeating the entire process.

Another possibility for investing with a VA loan is buying a 2, 3, or 4-plex using your VA benefit and living in one of the units  for a short period of time.  When you move on to your next assignment, you’ll be able to turn the entire property into an rental property legally.

Let’s start digging into the details!

The first thing we need to understand is the occupancy rule.

Occupancy Rule

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7 Secrets to a Successful Diet That Actually Works

By

On May 10, 2019

In Life hacks

I am on a diet that actually works for me.

I’ve lost 25 pounds in the last 3 months. 

Wait…?

Aren’t you a real estate guy?

Don’t you write about finance and stuff?

Yeah.

But I’m so excited about how this diet is changing my life and how I feel about myself.

Here’s some stats that go with that weight loss. My wife is measuring me in cm instead of inches.

RichChestBellyButtWeight 
1/21/2019106102108190.6
2/17/2019106.599107.5183.6
3/2/201910398106179.2
3/16/201910495104175.4
3/30/201910594103174.8
4/15/201910393101171.6
4/27/201910391100165.8

And I’m not done. There’s more weight to lose.

Do you want to know what diet I used?

Or why I’ve been so successful on this diet and why it’s been so easy for me to stay on it?

Most people give up on their diets way before the 3 month point.

ESPECIALLY New Year’s Diets.

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TSP Loan – Should I Get One?

By

On April 23, 2019

In Debt, Investing, Military, Real Estate

It is possible to get a TSP Loan.

But should you?

  • Couldn’t we use it to buy real estate and make a fortune?
  • Couldn’t we invest in the next hot thing, like an IPO, or bitcoin?
  • What about gold!?!

These are some of the questions we are here to answer today.  I’ve heard people suggest these very things.

I’m going to first explain how the program works, then explore how using it will impact your future retirement income (ouch). 

If you want the BLUF (Bottom Line Up Front) and skip the TSP Loan intro, click this section , just tell me if I should get it or not!

THE TSP LOAN PROGRAM

I’ll be abbreviating the TSP loan program here, but here is the source link from tsp.gov.

The TSP Loan program lets you borrow money from your own TSP account while you are either in the armed forces or employed by the federal government. 

HOW IT WORKS

When you borrow the money, it comes out of your actual TSP account.  It can be any amount between $1,000 and $50,000, not to exceed your contributions and earnings from those contributions.  It does not include any agency contributions (blended retirement system or BRS) or earnings from agency contributions. 

As you are repaying this loan, it is repaid with interest through payroll deductions back into your own TSP account.  This means that this large amount of money will not be growing tax advantaged in your TSP account during the time period you have borrowed it.  You lose the opportunity for that growth.  More on this later.

Keep in mind, even though you are paying interest, it’s a low, low rate and you pay it back to yourself, so it’s not really a cost to you.  The interest, however, is not tax-deductible.

LOAN ELIGIBILITY

To be eligible for a TSP loan, the following must apply:

  • Employed by uniformed services or federal government
  • In pay status
  • Only have one outstanding general purpose loan and one outstanding residential loan from any one TSP account at a time
  • Have at least $1,000 in your TSP account not counting agency contributions and earnings
  • Have not repaid a TSP loan of the same type within the past 60 days
  • Not had a taxable distribution of a loan within the past 12 months unless it was the result of your separation from Federal service
  • Not had a court order against your TSP account

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1031 exchange

8 Crucial Rules for a 1031 Exchange

By

On April 14, 2019

In Military, Real Estate

The 1031 exchange (26 U.S. Code 1031), otherwise known as a like-kind exchange, or Starker exchange, is one of the most important tools for a real estate investor.  I’ve seen too many military members not aware of this rule. 

I’ve actually talked with military members who have sold their investment properties and had no idea they could defer the capital gains through this exchange.  I don’t want this to happen to anyone.

Let’s get clear on it!

CAPITAL GAINS

When you sell real estate, Uncle Sam wants it’s cut of your profits.

There are only two ways to avoid paying the profits, or capital gains, on a real estate sale.

One exception is for homeowners who have met certain requirements with their primary residence, namely you’ve lived in the property 2 of the last 5 years (2 of the last 15 for military).

The other exception is for real estate investors, which we are focusing on with the 1031 exchange.

1031 EXCHANGE

The 1031 exchange got its name from the section of the IRS tax code it comes from.  This is the section that allows for a like-kind exchange that defers the tax liability of the sale into the next asset. 

Keep in mind, the 1031 exchange, or “like-kind” exchange used to apply to items other than real estate.  As of December 2017, a tax reform law that passed limits exchanges to only real estate.

You may also hear the exchange called a Starker Exchange named after T.J. Starker, who successfully sued the U.S. government in 1979. 

Before that, the exchange of real estate actually had to be simultaneous.  Now, you can typically have 180 days between the sale of the property and the purchase of the replacement property. 

Thanks Mr. Starker!

8 CRUCIAL RULES

1) LIKE-KIND

First, we need to understand what type of real estate can be substituted for what.

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capital gains military

How Military Can Avoid Paying Capital Gains on Real Estate

By

On April 7, 2019

In Military, Real Estate

You may not have to pay tax on all or part of the gain from the sale of your main home.  This is where you live most of the time.  A main home can be a:

  • House
  • Houseboat (cool!)
  • Mobile home
  • Cooperative apartment
  • Condominium

Actually, everybody can get this break on capital gains on the sale of a home under certain circumstances, but military members get an additional benefit that makes it much easier to meet the requirements.

WHAT IS THE CAPITAL GAINS TAX?

Cars, stocks, and bonds are capital assets.  A home is also considered a capital asset because it is a significant piece of property.  When you sell it for more than you paid, it’s called a capital gain.

When you sell a stock for more than you paid, you’ll need to report that to the IRS and pay taxes on the capital gain.  Primary homes get excluded from this as long as it fits certain criteria called the ownership and use test.

OWNERSHIP AND USE TEST

To be eligible for excluding capital gains on your primary residence, you must be the ownership and use test, as outlined in Publication 3 – Armed Forces Tax Guide.  You will be eligible for the exclusion if, during the 5-year period ending on the date of sale, you:

  • Owned the home for at least 2 years (the ownership test)
  • Lived in the home as your main home for at least 2 years (the use test)

If you don’t fully meet these two tests, you still may be eligible for a partial exclusion.  See IRS Pub. 523 for more details, and consult a smart tax advisor.

This is commonly explained as you have lived in your primary residence 2 of the last 5 years.

HOW MUCH CAN YOU EXCLUDE?

It seems like it should be unlimited, right?

Dream on.  The USGOV would never allow that!

You can exclude up to $250,000 of capital gains if filing single / $500,000 if filing jointly. 

This exclusion is allowed each time you sell your main home, but generally not more than once every two years.

WHERE MEMBERS OF ARMED FORCES GET AN ADDITIONAL BENEFIT

Here’s the good part!

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Are Charles Schwab Index Funds the Cheapest?

By

On March 27, 2019

In Investing

Charles Schwab index funds fees are certainly among the lowest.

There is a fierce battle waging between the big firms for the lowest index fund management fees.

We can thank Vanguard for low fees overall.  I think they started kicking too much ass and taking too much market share, so Fidelity and Charles Schwab index funds took notice and started slashing their fees.

This has been nothing but good for investors.  I’ll have to keep this and other similar posts constantly updated, as prices are slashed among the big three often.  I’ll summarize the recent changes later.

INTRODUCTION OF INVESTING AT SCHWAB

charles schwab index funds

When you buy Charles Schwab index funds, here’s some of what you get:

  • Mutual Fund OneSource service funds and other No Transaction Fee funds are $0 for online trades
  • All other mutual funds cost up to $76 to buy and $0 to sell
  • Online stock trades are $4.95 per trade
  • Online Schwab ETF OneSource trade are free
  • Other ETFs can be purchased for $4.95 per trade

If you are going to buy Schwab index funds outside of the Schwab mutual fund family, definitely invest somewhere else.  Their fee for other mutual funds really makes it cost prohibitive (that means way too damn expensive!)

WHAT’S AWESOME ABOUT CHARLES SCHWAB INDEX FUNDS?

  • $167 billion under management in mutual funds and ETFs
  • 3rd largest provider of index funds (behind Vanguard and Fidelity)
  • No minimums to invest (This is an issue at Vanguard)

CHARLES SCHWAB INDEX FUNDS

I’m going to talk about the features and fees of the three most popular and competitive mutual fund categories.  Here we go!

S&P 500 INDEX FUND

Aaa yes, the benchmark of all index funds in my opinion.  It has a dear place in my heart as my main investment during most of my military career.

Just that.

Nothing else.

It is Warren Buffett index fund recommendation of choice.

EXPENSE FEE:                          .02%

MINIMUM INVESTMENT:      NONE

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5 Worst Financial Mistakes to Avoid for Military Members

By

On March 18, 2019

In Debt, Investing, Military, Real Estate

Maybe you’ve made some of these mistakes military members make.

I made a few of these mistakes myself, but I’m still here today doing relatively well.

Let’s see how you measure up.

1. GOING INTO DEBT

I want to use a few other phrases to signify what kind of mistakes get military members or families in trouble.

It’s living large when you haven’t made that money yet.

Spending money you haven’t earned.  Otherwise known as… Keeping up with the Jones’s. 

The funny thing is, the Jones’s are going into debt to keep up with you too!

Here are some things that will really put you into debt:

Buying or renting much more house than you need…

I see it time and time again in the military.  A married couple with one newborn buying a 4000 sq ft property.  Not sure what they will do with 6 bedrooms and 4 baths!

You want to be well off? Get the smallest property that will fit your needs. (Awww, that’s no fun!)

Having a new house custom built…

But it’s so nice to have a big house built to your specifications.  You deserve it!

Big houses need lots of things to fill them up.  They just don’t look right without expensive furniture and nice cars.  They are also expensive to heat and cool.  Good luck!

New or expensive cars…

Whatever you do, don’t buy a new car.  On top of that, don’t ever fall for that crap where you think you are getting some special benefit through military car sales.  You are still overpaying and getting KILLED on depreciation the day you put the first mile on it.

I like buying used cars with one previous owner and low mileage. Ideally, you pay cash for it.

Vacationing while overseas…

You are stationed in Germany, and there are LOTS of 4 days weekends, so you are hitting a different country on each one.  You are in Japan, and it’s the perfect gateway to Southeast Asia.  Everybody will be filling their Facebook and Instagram feeds with travel while stationed overseas. 

Don’t overdo it.  Take advantage of existing geography and vacation in areas around you that you.  Try to drive there instead of flying, and try to Airbnb instead of hotels.

The cardinal sins of debt…

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How to Get a VA Loan

By

On January 26, 2019

In Military, Real Estate

What Exactly is the VA Loan?

The VA Loan is a mortgage that helps veterans finance the purchase of homes with good loan terms and interest rates that are typically better than what you would see on other types of mortgages.

VA home loans aren’t made by the VA itself, but by private lenders such as banks, savings and loans associations, and mortgage companies.  VA guarantees the loan if and when the applicant is approved. 

People often say the VA guarantees loans, but that’s not accurate.   Actually, the VA guarantees a portion of the loan.  This still gives lenders a lot more comfort in lending, because if you stop paying, there is a higher chance they won’t lose any money on the deal.

For loans over $144,000, the maximum guarantee amount is 25% of the 2019 VA county loan limit.  For most counties in the U.S., this amount is $484,350.  For high cost of living areas such as Honolulu or even certain parts of Denver, the amount is $726,525.

What’s the Most I Can Borrow?

There actually is no limit.  The issue is, are you trying to avoid a down payment?

In most cases, if you don’t exceed the county loan limit, then you can get that loan with no money down (Yay!).

Once you surpass the county loan limit, the lender will want a down payment from you because the VA will not provide a guarantee for that portion of the money.

Click here for a PDF linking to all the 2019 county loan limits

I want to be clear about this, because it’s confusing.

If you wanted to borrow $800,000 for a house in Honolulu, you might be required to put up a down payment on a VA loan, but it won’t be as big as you think. 

You wouldn’t be responsible for the down payment on the entire amount, just for a down payment on the amount exceeding the county loan limit.

$800,000         want to borrow

$726,525         county loan limit

$73,475           amount exceeded county loan limit

The lender may ask you to make a 20% down payment on $73,475, which works out to be about to be $14,695.

That’s way cheaper than paying 20% on $800,000 which is $160,000.  Ouch!

So buying a really expensive house (even a 4-plex) in Honolulu or a similar HCOL area with a VA loan may not be possible with no money down, but you might be able to do it with a small down payment. 

You CAN, but that doesn’t necessarily mean you SHOULD.  There are many factors to consider.  Often, expensive rental properties in HCOL areas do not make great rentals, and I recommend against them for military members.

Read my article Real Estate Mistakes Military Members Should Avoid

So bottom line, there is no VA limit to how much you can borrow.

You have to put a down payment on the amount over the county loan limit you want to borrow.

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What My Grandmother Taught Me About Real Estate

By

On January 6, 2019

In Real Estate

I have a deep love for real estate that I can’t fully put into words.

I’ve done several podcasts and interviews and been asked on many occasions why I got into real estate.

It took me a while to figure out the real answer.

It’s a deep respect for what real estate meant in my Grandmother’s life.

She’s the first househacker I ever met, although when I heard about her real estate story as a child, I didn’t know that was called househacking.

I just knew it was smart.

As you’ll see, however, her story is so much more than just househacking.

My Grandma grew up poor.  Really poor.

She was raised in Los Angeles in a neighborhood known as Watts.

In case you haven’t heard of Watts, it has a reputation for being a low-income, high crime area.

It’s well-known for gang problems and the Watts riots of 1965.  Since the 50’s, it’s been a rough neighborhood.  It’s still rough today, although improving.

My grandma eventually moved to Glendale, California and married when she was very young.

She had three children with my blood grandfather and adopted a child as well.  I’ve never met my Grandfather.  Apparently, he wasn’t much of a family man.  He wasn’t cut out for family life, and left when my mother was about 8.

So my Grandma was left to raise four children on her own without any help from the father.

Grandma was frugal.  She had to be.

She worked at an insurance company in L.A. making about $500 a month.  She owned a house that was worth $36,000 and eventually paid it off. (Smart move Grandma!)

Her car was paid off as well.

She ran into a dilemma at work where they wanted to move the insurance offices from Glendale to Costa Mesa, a more expensive area near the beach.  (This is all in the vicinity of L.A.)

She got some great advice from her mother-in-law, ironically enough, that she should buy a four-plex close to the new office, live in it, and rent out the other three units.

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My name is Rich. I’m Rich on Money

Rich

I paid off our $280k mortgage in six years, $32k in student loans in 1 year. I flipped houses and purchased rental property with cash while living overseas in the military. I currently own 20 rental properties mortgage free. Read More…

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