401k or not?

Question

Okay, I'm mostly looking for reassurance that my plan is well thought out and I'm not making a bad decision. I am 20 years old right now in the Navy and I'm certain that buy and hold real estate is in my future. so here is my predicament. since day one in the Navy I have been putting $300 per month into the military version of a 401k, called TSP. I don't get and company match on it and the account now has about $6,000. By the time my contract is up this amount should be somewhere in the range of 22,000-25,000, plenty to fund my first real estate acquisition after the Navy. What i want to do is withdraw the $6,000 (its roth so I shouldn't take much of a hit from taxes), roll it into a 3 year CD and continue the $300 per month saving. this way the money will be safe from the stock market and more accessible when the time comes to purchase real estate. Me and my wife plan on using a VA loan to buy a multifamily to live in virtually free, and use this nest egg to purchase another multi or single family. This way we should be able to own 2 Cash flowing properties within a relatively short time (6 mo. or so) after I'm out of the Navy.

Loren Whitney · Answer

Peter, I agree with the others that consulting advice from a CFP is a good idea. From what you've said, it doesn't sound like withdrawing from the TSP now will put you any further ahead unless you have a great opportunity today. For general information, you may consult your TSP administrator. They probably have some great resources for you to check out.

Good luck and thanks for your service!

Eric Dufault · Answer

Why are you waiting until you get out?  Also I agree with Account Closed

that the CD idea is a little too conservative.  I would get into a multifamily as soon as possible (with no money down) if I could do it all over again while I was stationed somewhere.  Once you either take orders or decide to move somewhere else you could refinance the VA loan and utilize it again with no money down, assuming by that time you would have at least 20% equity in the property.  Just my two cents.

Account Closed · Answer

I would run this by a certified financial planner.

Get facts on exactly what the tax hit would be.

Unless your TSP does very poorly, its unlikely that a CD would earn you a greater return. Make a decision based on numbers - a CFP would be able to run that for you if you are uncertain about doing it yourself

Just some thoughts. I am not a personal finance guru.

Darnell Kramer · Answer

@Peter Whitaker

Consulting a CFP can be good, but the advisors are usually geared towards products of the company that they work for.  IF you do go that route find a fee based adviser as they are not tied to product commissions.

I am in the Navy and dropped contributions to my TSP. I do suggest for many to keep the TSP, as otherwise they would just spend the money. TSP holders cannot withdraw TSP money till you get out, die, or take a loan.  I moved all my contributions to my normal Roth IRA, which will move into a self-directed IRA that will invest in property.  Personally that is what I found would be the best way to grow that portion of savings for investing.

San Diego is a different approach.  The entry cost is higher, but there are other great advantages and dis-advantages to the area.  I was always taught that you invest in areas that have a few things. 1. Good jobs. 2. Good schools. 3. Good lifestyle.  These will keep people moving to the area, working in the area, and needing your rentals. On the other side cost of entry, and California laws, but I digress.

Good luck out there and whatever route you take keep working towards it.

Peter Whitaker · Answer

Thanks for all the advise. The reason I don't want to start now mostly due to being located in San Diego. The housing market is 2-3x more expensive here than it is in central NY where I plan to invest after the Navy. I'll be able to save enough in these next 4 years for at least 1 most likley 2 down payments when I'm out. Also, from my observation and what I have read, San Diego isn't the place to invest with a buy and hold strategy right now.

Justin Green · Answer

Peter, I am a younger guy as well and would not recommend pulling your TSP funds to sit in a CD that gains 1% if your lucky. You will likely take a tax hit on your Roth as well. I work with many younger VA loan buyers also. I always recommend you will need some cash to present a strong offer on a property and have some negotiating room especially if it is a hot property. The VA loan is a wonderful benefit and if you put some skin in the game to prove you are serious that will help your offer. I had $6000 in my 401K at 23 and at 33 I have almost $200K in it from consistent contributions. You can loan against most 401K's if it rolls into a private sector 401K (I admit I don't know the TSP very well). I just loaned myself $50K out of my 401K to get into another property. No tax hit that way. I Love Real Estate and feel similar that my real estate is my retirement not the 401K, It is a nice cushion growing on the side though.

Elizabeth Colegrove · Answer

@Peter Whitaker

I agree with @Eric Dufault why are you waiting till you get out. Welcome to Biggerpockets!

We got started through personal properties. We bought our first property using a VA loan and than gutted it. We rented it out when we left. Getting started in personal properties allowed us to get started with very little down.

Personally I would leave the $6k alone. My husband is active duty, Navy and he is still investing in his TSP account every month even though we own 5 houses, with the plan on buying 2 more in the next 10 months.

Darron Stewart · Answer

@Peter Whitaker

The TSP has some have cd type return, but some really great options so would look to maximize return on those dollars and leave in either TSP or upon exit roll to IRA/401k.  Would not recommend pulling any out, but if you need cash, just cut back contributions or stop for a bit.  It will add up fast if you let it be!  I maxed mine out and could only get about 20-30k into it before I retired, but now it is worth about 60k.  As for real estate investing, bought rentals in military and after I got out.  Was difficult while in but made a bunch with appreciation when I sold both.  After I exited started over again and can now self manage and do all repairs, etc.  Get a plan in place and stick with it, I buy with a lot of equity and high cash flow.  Your duplex plan should serve you well and when you get that up and rolling good, duplicate with either another or a single family - my first choice as they sell quick if you ever need to cash out, life happens and at times you may need liquidity.  Best of luck in your decision and thanks for serving!

401k or not?

Most Popular Reply