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
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
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
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
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!
When you sell real estate, Uncle Sam wants it’s cut of your
There are only two ways to avoid paying the profits, or
capital gains, on a real estate sale.
The other exception is for real estate investors, which we are focusing on with the 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
First, we need to understand what type of real estate can be
substituted for what.
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:
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.
Unfortunately, many CPA and “tax professionals” are unaware of this military benefit.
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
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
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
When you buy Charles Schwab index funds, here’s some of what
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
3rd largest provider of index funds
(behind Vanguard and Fidelity)
No minimums to invest (This is an issue at
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.
It is Warren Buffett index fund recommendation of choice.
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 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.
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.
$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
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.
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.
DISCLOSURE: THIS POST MAY CONTAIN AFFILIATE LINKS, WHICH MEANS I GET A COMMISSION IF YOU DECIDE TO TAKE ADVANTAGE OF A SERVICE THROUGH MY LINKS, AT NO COST TO YOU. PLEASE READ MY DISCLOSURE FOR MORE INFO.
I’m sharing several TSP allocation strategies for 2021.
This is essentially how to invest your TSPin a way that will lead to financial independence at or before retirement.
Through using these types of investment strategies (I’ll tell you exactly which one I used), I became a military millionaire well before retirement.
Anyone can duplicate this.
The strategies I talk about in this article are:
S&P 500 Index Allocation
Total Stock Market Index Allocation
Warren Buffett TSP Allocation
Dave Ramsey TSP Allocation
Paul Merriman TSP Allocation
Total World Stock Market TSP Allocation
Balanced Index Fund Allocation
My Rich on Money Personal Portfolio Allocation
Changes for 2021
My investment recommendations did not change in 2021.
The biggest mistake people make with retirement investing is tailoring their strategy year-to-year depending on what’s going on in the world.
This causes you to make far less money than you would if you stuck with the same strategy through thick and thin.
Global Pandemic? So what.
This tried and true method of how to invest in the TSP will make you rich in retirement if you stay the course.
Don’t bounce around with useless TSP investment strategies like timing the market, playing with TSP charts, selling before elections, buying on dips, selling on bad news, etc.
Instead, use these tools to make an informed decision about the best long-term TSP strategy for you.
Several of these TSP investment strategies are recommended by well-known money gurus such as Warren Buffett and Dave Ramsey.
I’ve also added every TSP investment option I could find that will work with the available funds.
TSP ALLOCATION 2021
Below is a list of different potential TSP allocation strategies to show you how to invest in the TSP in 2021.
I’ve pulled these from various sources and as I discover new ones, I will update this. Please send me your recommendations with supported documentation.
The S&P 500 Index
This is the asset allocation I used most of my working life.
When I opened a Roth IRA in 1999, I called my bank and asked to put it in the S&P 500. At the urging of an investment advisor (I’m not a fan of most), I put it in an aggressive growth fund instead. In 2000, it lost half its value.
From that day forward, I decided S&P 500 would be the way I invest. I had read before that Warren Buffett said something to the effect of, if you don’t have time to look at stock charts and read finance news all day long, you are better off investing in the S&P 500 index and never touching it.
Actually, here’s exactly what he said in 2013 in his letter to shareholders:
“In the 20th Century, the Dow Jones Industrials index advanced from 66 to 11,497, paying a rising stream of dividends to boot. The 21st Century will witness further gains, almost certain to be substantial. The goal of the non-professional should not be to pick winners…but should rather be to own a cross-section of businesses that in aggregate are bound to do well. A low-cost S&P 500 index fund will achieve this goal.”
Additionally, instead of investing his wife’s inheritance in Berkshire Hathaway stock, he plans to invest it in the S&P 500 index.
That should tell you something.
If it’s good enough for Warren, it’s good enough for me.
To mimic a full investment in the S&P 500 index, just invest 100% in the C fund.
Instead of just investing in the largest companies that make up the S&P 500, you invest in those plus mid and small cap companies as well. This index encompasses the entire U.S. stock market (as the name suggests!)
Financial Independence Retire Early (FIRE) enthusiasts will swear to the superiority of this index to the S&P 500, and to suggest considering anything else is heresy!
It’s clearly more diversified than the S&P 500, and small caps have been known to outperform large caps over the long term, albeit with potentially a little more volatility.
Over long periods of time, the total stock market index fund and S&P 500 had similar performance, and it would be hard to say for sure which will outperform in the future.
In my opinion, you are doing great with either one.
80% C and 20% S will closely mimic this popular index.
The Warren Buffett TSP Allocation
Image from moneycrashers.com
While I mentioned earlier I got my idea for an all S&P 500 index allocation from something Warren Buffett said in a newsletter, he actually has more specific instructions I want to address here.
I talked earlier about how he had a plan for how the money left for his wife would be invested. I said he would invest in S&P 500 index instead of Berkshire Hathaway, but that’s only part of the story.
He also has a plan to throw bonds into the mix to smooth out the ride a little bit, which is a common investment strategy. The amount of bonds you throw into the mix will dampen the volatility, but will also limit your upside potential during booms as well.
In the same newsletter in 2013, he talked about his specific advice to his trustee on how to invest the remaining money that will be left to his family:
“My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund…I believe the trust’s long-term results from this policy will be superior to those attained by most investors – whether pension funds, institutions or individuals – who employ high-fee managers.”
As luck would have it, this is easy to mimic with the funds offered in the thrift savings plan. 90% C fund and 10% F fund.
Next is Dave Ramsey’s strategy.
Dave Ramsey TSP Investment Advice
I’m a huge fan of Dave’s book Total Money Makeover. His baby steps for getting out of debt are legendary!
He also has TSP investment recommendations on how to invest in the thrift savings plan. His caveats are typical of Dave’s approach to money.
In typical Dave fashion, he suggests that you first pay off all your debt besides your primary residence before you begin long term investing and have an emergency fund of three to six months of expenses as well.
He has two sets of recommendations. One slightly more aggressive than the other.
Next: Money Guru Paul Merriman’s TSP Allocation Reccomendation:
Paul Merriman TSP Allocation Recommendations
Paul Merriman is a successful advisor on mutual fund and index fund investing. He’s an accomplished author, speaker, and is well known for the ultimate buy-and-hold portfolio.
This portfolio is comprised of index funds and has an amazing track record. Unfortunately, due to the various types of funds held in this portfolio, it is impossible to mimic with the TSP funds available.
If you are curious, I wrote an article about this how to invest in this portfolio:
He explains that most notably what is missing from the TSP funds is value funds, which is a key component of his strategy to boost typical index fund returns.
He does make specific recommendations for TSP owners using what is available to us.
He has 3 separate TSP allocation recommendations based on your risk tolerance: conservative, moderate or aggressive.
With all three of these portfolios, the equity part of the portfolio is split the same way:
50% in S, 25% in C, 25% in I.
With the aggressive portfolio, the entire amount is invested this way. The conservative and moderate portfolios have a portion of the total invested in the F and G funds. This portion is not exposed to the risk of the stock market, as the C, S and I funds are.
His advice is that, generally, younger investors can afford to be more aggressive, and as you get older, you become more conservative, but this is a generalization and everybody’s situation may differ.
The conservative portfolio: 18% G and 42% F, and the rest in S, C and I at 50/25/25.
The moderate portfolio: 12% G and 28% F, and the rest in S, C and I at 50/25/25.
The aggressive portfolio: 50% S, 25% C, 25% I
Here is the link to his article on TSP recommendations:
Attached is a graphic from his website outlining exactly how to do this strategy.
Maybe you know how you want to invest your TSP, but you are concerned about huge drops in the market?
Total World Stock Market Portfolio
This portfolio mix is a TSP investment strategy modeled loosely after the Vanguard Total World Stock Index Fund (VTWSX).
It will allow you to have exposure to stock markets around the globe, including the United States and developed foreign markets.
The weakness of this portfolio compared to the Vanguard one is exposure to emerging markets.
The I fund currently only has developed economies, and not emerging markets. There supposedly is a plan in place to change the I fund in the future to include emerging markets, but it hasn’t happened yet.
This matters, because the I fund isn’t as diverse as it could be, and that could affect returns.
The Vanguard fund I am modeling after has roughly 60% of the portfolio in U.S. stocks, and the rest are international. To model this portfolio:
Use 48% C and 12% S to make up the U.S. stock market, then use 40% I for the rest.
The 48/12 mix comes from splitting 60% into an 80/20 mix to achieve the Total Stock Market Index.
Balanced Index Fund Portfolio
This portfolio is meant to mimic the Vanguard Balanced Index Fund Admiral Shares (VBIAX).
It is a way to have access to the entire U.S. stock and bond market. It has far less volatility than the Total Stock Market Index by using bonds to smooth out the ride. The balance of this portfolio is 60% stocks, and 40% bonds.
This can be accomplished through 48% C, 12% S, and 40% F.
Obviously, you could adjust the stock/bond ratio to meet any level of risk that you would like.
Three Fund Portfolio
This is a favorite among Bogleheads (Those who love Vanguard and its founder Jack Bogle).
This fund is comprised of 1/3 each of the following:
Vanguard Total Stock Market Fund
Vanguard Total International Stock Market Fund
Vanguard Total Bond Market Fund
This fund is broadly diversified, but heavily weighted in large cap stocks. Remember, the I fund lacks the exposure to emerging markets that the Total International Stock Market Fund has, so the thrift savings plan version won’t be identical until the I includes more countries and emerging markets.
To mimic the Total Stock Market fund, I split the 33% in an 80/20 C/S split. This is where I get my weird percentages from.
A way to closely mimic this portfolio is: 27% C, 7% S, 33% I, 33% F.
Make sure you use these recommended allocations correctly!
Most people screw this up.
My Current TSP Allocation for 2021
There are literally thousands of people who google “Rich on Money TSP Allocation” every millennium.
Until now, nobody has ever known how the brilliant mind of a master invests.
I like the idea of being a little heavier weighted on the mid-cap stocks as opposed to being just all S&P 500 index fund. Of course, I’m going against Warren Buffett’s philosophy.
Not sure how wise that is!
I used to have international sprinkled in there at 10%, but I gave up on it. There is enough international exposure between C and S IMHO.
Here it comes…
The Rich on Money world-wide dominance TSP portfolio:
50% S / 50% C
I know, I know. I should be charging for revealing my personal portfolio. I just have too much love and altruism in my heart (and no one reads this blog).
Best TSP Strategy for 2021
Now this is the important part. I reveal secrets here that nobody else knows…
Well, maybe not.
The question of what is the best TSP fund for 2021 gets asked all the time.
It’s a fundamentally flawed question.
If you are asking which TSP fund is best, you may think that jumping between funds at the right times depending on cycles, economic data, politics, etc. will yield you superior returns.
You may also believe that experts scouring the market for data and gifted chart readers have some way of knowing which funds should outperform in the near future.
I’m here to tell you, people with those abilities do not exist.
That’s what I gave you in this article. Options for great TSP allocation strategies that will work better than any other strategy.
Using any one of these recommendations over the long term is essentially how to invest in the TSP for 2021 or any other future year if you:
regularly contribute to your Thrift Savings Plan
ensure you are getting matching if it’s offered
stick with the same TSP investing strategy over the long term
Changing strategies or funds often is a recipe for low returns.
Want to know what to do with your IRA and real estate too?
To understand all this TSP advice, it helps to know the five core funds inside the TSP and what they consist of. This is important in understanding how they are used in building TSP investing portfolios.
TSP INVESTING GUIDE – THE FUNDS
The G fund contains short term U.S. Treasury securities with no exposure to the risk of the bond or stock market
The F fund is an index of world-wide government, corporate, and mortgage-backed bonds
The C fund is equivalent to the S&P 500 index.
The S fund is an index of mid and small-cap stocks not included in the S&P 500.
The I fund mimics the MSCI EAFE Index of international stocks in 21 developed markets excluding the United States and Canada.
The L funds are professionally managed investment funds tailored to a specific time horizon.
Now we dive into each one a little more in depth before going into our TSP investment strategies:
The G Fund – The Government Security Investment Fund
Pros: No volatility and backed by full faith and credit of the U.S. government
Cons: Can barely match the inflation rate; rate based on prevailing interest rate, which is currently low
This unique investment is only available for TSP investing. It’s rate is equal to 10-year treasuries, but their liquidity and protection from interest rate fluctuations is superior to 3-month T-bills.
The interest rate resets monthly and is based on the average of U.S. treasuries with a duration of 4 year or more.
I’ll tell you how I’ve invested most of my career.
S&P 500 index fund. That’s it.
But, shouldn’t I be able to do better than that?
This post will show you a data-proven way to boost your index fund returns.
Paul Merriman is a believer in index fund investing. Additionally, he is a nationally recognized authority on mutual funds, index investing, asset allocation, and ran his own investment advisory firm since 1983. Paul has been on Wall Street since the 1960’s.
He’s been preaching something called the ultimate buy-and-hold portfolio for the past 20 years. His ideas aren’t revolutionary. It’s very similar to Larry Swedroe’s research on small value stocks and their superior performance over long periods of time. Moreover, he believes in the work of Dr. Fauna and Dr. French in regards to diversification to increase returns without adding risk.
With the ultimate buy-and-hold portfolio, we are going to keep the S&P 500 index, but only 10% of the portfolio, and then give 10% each to 9 other asset classes.
Most people say nothing outperforms the S&P 500 index over the long term. Well, that’s not exactly true.
Over the long term, 8 of the 9 asset classes we’ll be diversifying with have outperformed the S&P 500. Consequently, the risk is also roughly the same.
So the main ingredient in this portfolio is still the S&P 500 index. According to Merriman’s research, it has compounded at 9.3% between the years of 1970 to 2016.
Personally, that feels a bit high, but we’ll stick with his numbers today. I’m more comfortable claiming a historic 7% rate.
THE ULTIMATE BUY-AND-HOLD PORTFOLIO
For the sake of explaining this portfolio, think of the S&P 500 index as Portfolio 1. To start, we will invest $100,000 into our portfolio today between the dates of 1970-2016 to illustrate the growth that would have occurred with each step of diversification over that period.
At 9.3%, $100,000 would have grown to $6.5 million. No way I can live off that! We’ve got to do better!!