Advice on investing/saving for downpayment?

[Juniper117]

I've done some research, but all of the varying rules for early withdrawls and borrowing for a downpayment have confused me. I'd love some input on my options.

 

We owned a home, but sold it 2.5 years ago. I understand that, technically, we would be considered first-time homebuyers when we buy again in a year or two.

 

DH currently is able to invest in a 401k thru his employer. He just became eligible this month (he had to have 6 months in at this job). The match is 100% up to 5%. It's 25% vested after a year (so 6 months from now, not 1 year after contributions start), 50% vested after 2 years, and 100% after that. We live in a VERY HCOL area and hope to move ASAP. It's possible that we could move before the year is up, but unlikely. We will probably move next summer or in a year and a half.

 

DH will take a job with a large employer next (either his former employer or another company in the same industry). I do not know what their rules will be as far as borrowing against a 401k for a first home purchase, so I am unsure about investing and then rolling it over.

 

So, what do you recommend? I'd hate to miss out on the 401k match, but I'd also hate to have to put my down payment in a 401k and have to pay taxes and penalties to get it out. We could open a Roth IRA, but I would have to pay taxes on it, right? (I believe it's just the penalty that's waived if you withdraw it early). Should I just put it in a savings account?

 

Any help would be great!

[Operation_Home_Ownership]

IMO you are making it too complicated.

Just open up a MM account and at minimum place the difference between your current rent and what you plan for your mortgage payment to be including taxes and stick to it until purchase. So you are not just saving, but also building discipline in making that payment for the next XX years.

 

If you are finding it difficult to do this, then perhaps it is not a time for you to buy as you can not afford the minimum required to maintain a home. So it will also prove as the litmus test for reaching that goal if you are not quite there yet.

[Juniper117]

Our mortgage payment would actually be about $600 less than our rent is, currently. We're moving from a HCOL to a LCOL.

 

And if I dont take advantage of the 401k, aren't I missing out on at least 25% more (the vested match)?

[Operation_Home_Ownership]

I do not know what you mean by HCOL to LCOL

 

And not sure why you think a 401K is a piggy bank for a home--it is not.

 

Getting the employer match or being vested in a plan and tapping into it the min it is funded gets you nowhere as they will not let you remove the entire balance for any reason. No matter what any write-ups tell you about tapping into IRAs, 401Ks, etc for home purchase is easy, you dont have to pay it back, blah, blah, blah, it isnt...red tape & rules galore is more like it.

 

I still think you are making this too complicated as you will not put $$$ into a retirement fund double it just by the employer matching and pull it out to buy a home.

 

MM account nice & liquid is still my advice.

[drew3918]

I do not know what you mean by HCOL to LCOL

 

And not sure why you think a 401K is a piggy bank for a home--it is not.

 

Getting the employer match or being vested in a plan and tapping into it the min it is funded gets you nowhere as they will not let you remove the entire balance for any reason. No matter what any write-ups tell you about tapping into IRAs, 401Ks, etc for home purchase is easy, you dont have to pay it back, blah, blah, blah, it isnt...red tape & rules galore is more like it.

 

I still think you are making this too complicated as you will not put $$$ into a retirement fund double it just by the employer matching and pull it out to buy a home.

 

MM account nice & liquid is still my advice.

HCOL =High Cost Of Living

LCOL=Low Cost Of Living

[Operation_Home_Ownership]

HCOL =High Cost Of Living

LCOL=Low Cost Of Living

 

AaAAaaaahhhhh thanks!

[Kevin20]

I strongly agree with OHO -- your 401k is not a piggy bank for short term goals. The government builds in heavy early-withdrawal penalties to help you to understand that fact so you'll treat it as your retirement savings, as intended. You may get a 100% match, but you will lose all of that on penalties if you withdraw the money. And merely borrowing against the 401k is fraught with risk and carries an opportunity cost people do not understand, and I've seen people get deeply screwed by doing that.

 

To repeat what OHO said -- your reply went off in a misdirection -- perhaps you shouldn't buy so soon, and should rent instead. If you are moving to a lower cost of living area, well the rent there should be cheaper than your current rent, right?

 

OTOH, you may view buying a home as part of your retirement plan and devote your money to that for now. If you really really want that 401k match, then try to reduce other expenses so you can afford 401k savings.

 

In any case, a goal with a < 2 year time horizon means you should just save that in cash savings. You could try the financial markets and might get lucky, but the standard wisdom is that that is too risky, and yes now we all know what a sever market correction feels like.

 

One caveat -- if you do indeed move and DH switches jobs, you should in any case transfer any current 401k balance into a traditional IRA ... I much prefer that to rolling it into the new 401k. You can carry that IRA with you throughout your life to receive 401k funds upon changing jobs. With that, you MAY be able to withdraw $10,000 from the IRA for a down payment without penalty tax (but you would owe regular income tax on it).

 

Can you be classified as a first-time homeowner and do that? Not sure, but the answer is in the IRS pub on IRAs, Pub 590.

[saladdin69]

Less then 5 year time frame use MM.

 

No way I'd turn down up to the match free money.

[higher180]

if saving less than 5 years I would save it in a high interest savings account

 

if saving more than 5 years, I would invest it in mutual or index funds.

 

of course this is advice I've heard from DR. and a few other personal finance gurus

[TroyP]

I would save cash in either a high yield FDIC insured savings account or a money market fund. Even if you invest in a risky Money Market fund (like the Reserve fund which blew up last year) your risk of loss is still very minimal. I believe Reserve Fund investors sill received better than $.95 on the dollar.

 

I look at my 401(k) as spent money. That money is gone for any and all purposes other than funding my retirement. It shouldn't be looked at as an emergency fund, or an opportunity for a quick return, because you'll tap the account, and screw yourself in the process. The only good call I've ever seen with a 401(k) was a guy who liquidated his 401(k) to buy out his wife's interest in their house when they split. He cleaned out his 401(k) in September of 2007. A year later, half his money would have been gone. The penalties and interest were a small price to pay.

 

My home purchase fund is currently split between a portfolio of mutual funds and a high interest savings account. I'm about 2 - 3 years out from buying a condo, so I can afford to take a bit of risk right now. As I get closer to making a purchase, I'll sell off my mutual funds in favor of cash. I have a higher risk tolerance than most though, so I wouldn't recommend this.

[higher180]

I would save cash in either a high yield FDIC insured savings account or a money market fund. Even if you invest in a risky Money Market fund (like the Reserve fund which blew up last year) your risk of loss is still very minimal. I believe Reserve Fund investors sill received better than $.95 on the dollar.

 

I look at my 401(k) as spent money. That money is gone for any and all purposes other than funding my retirement. It shouldn't be looked at as an emergency fund, or an opportunity for a quick return, because you'll tap the account, and screw yourself in the process. The only good call I've ever seen with a 401(k) was a guy who liquidated his 401(k) to buy out his wife's interest in their house when they split. He cleaned out his 401(k) in September of 2007. A year later, half his money would have been gone. The penalties and interest were a small price to pay.

 

My home purchase fund is currently split between a portfolio of mutual funds and a high interest savings account. I'm about 2 - 3 years out from buying a condo, so I can afford to take a bit of risk right now. As I get closer to making a purchase, I'll sell off my mutual funds in favor of cash. I have a higher risk tolerance than most though, so I wouldn't recommend this.

 

 

OP I think this is good advice too.

 

Troyp, are you planning on paying cash for your condo? I like your investment strategy for your home purchase