Mortgage downpayment

[MrsRNA]

DH and I are going to start saving for a mortgage downpayment, however, we won't be buying for at least 5 years, probably closer to 10. I'm not sure where we should be putting the money in the mean time. It's not something we would need liquid so I'm thinking about putting it in his TSP but I'm not sure if that's a dumb idea.

[krzywon]

DH and I are going to start saving for a mortgage downpayment, however, we won't be buying for at least 5 years, probably closer to 10. I'm not sure where we should be putting the money in the mean time. It's not something we would need liquid so I'm thinking about putting it in his TSP but I'm not sure if that's a dumb idea.

Don't put money into retirement savings (TSP) that you plan on using for a down payment on a house. Withdrawals from 401k or equivalent plans are to be taxed and you are penalized 10% for early withdrawal. 401k loans are not in your favor because you are no longer earning on the money lent. Sticking it into a high-yield savings account and letting it sit there is a much better option.

 

If you want to see some type of return, open an account at Fidelity, Schwab or Vanguard and stick the money into an index fund.

[Kevin20]

DH and I are going to start saving for a mortgage downpayment, however, we won't be buying for at least 5 years, probably closer to 10. I'm not sure where we should be putting the money in the mean time. It's not something we would need liquid so I'm thinking about putting it in his TSP but I'm not sure if that's a dumb idea.

Don't put money into retirement savings (TSP) that you plan on using for a down payment on a house. Withdrawals from 401k or equivalent plans are to be taxed and you are penalized 10% for early withdrawal. 401k loans are not in your favor because you are no longer earning on the money lent. Sticking it into a high-yield savings account and letting it sit there is a much better option.

 

If you want to see some type of return, open an account at Fidelity, Schwab or Vanguard and stick the money into an index fund.

 

 

I agree, do not use a retirement account at work for that purpose -- anything you think you'd accomplish will be undermined by the heavy tax penalties. There is a reason those are called "retirement plans".

 

Plus no need, just use a regular brokerage or mutual fund account -- you won't be paying a lot of taxes unless you are realizing a lot of profits. For a mid-term goal like yours I'd want to be very diversified -- not just one index fund, but several index funds, to spread across the major flavors of assets ... stocks, bonds, foreign stocks/bonds, maybe real estate investment trust funds (REITs) also. Basicall be as diversified as possible, as you can be. Though if just starting off with a small intial investment, you'd likely have to begin with one fund, and branch out from there as you are able to meet minimum investment levels.

 

An exception to the above rule about retirement accounts, if you count as "first time home buyers" (which is not necessarily restricted to ACTUAL first time home buyers), you may be able to withdraw individual IRA money up to $10,000 without penalty. You might want to check the current rules on that.

[MrsRNA]

The main reason I wanted to put it into the TSP is because DH is AD Army and I'm joining as well. We haven't had a lot of stability location wise so far so there is a possibility that we won't end up buying until after we retire.

[MeagerMoney]

I agree with krzywon, place it in a high yield savings account or money market account. There is also the option of doing CD's up until you are ready to use the money.

[Kevin20]

The main reason I wanted to put it into the TSP is because DH is AD Army and I'm joining as well. We haven't had a lot of stability location wise so far so there is a possibility that we won't end up buying until after we retire.

 

 

Keep in mind the problem is, if you were to withdraw that TSP money prematurely (ie, before age 59 1/2, generally), the Federal income tax you'd owe as a result is your marginal tax rate (tax bracket) times the amount you withdraw -- ie, maybe you're in the 25% bracket, whatever -- PLUS a 10% penalty. Not so bad if you are in a lower tax bracket of course. But you have to know your tax bracket to analyze this intelligently -- or more to the point, estimate your tax bracket 5 - 10 years from now.

 

The tax & penalty puts one typically at around 35% taxes or more, not including any state income tax and penalty, if state taxes apply. Not uncommon that someone would wind up owing 45 - 50% of money withdrawn in taxes as a result of a premature withdrawal. That is, to get your hands on $30,000 after tax, you'd have to withdraw 50K or 60K.

 

That generally makes treating a TSP or other "qualified" retirement plan as a piggy bank a bad idea, unless you are sure one of the tax-penalty exceptions applies, or the withdrawal will occur in retirement or during a year of very low income.

 

It would be preferable to save for retirement and shorter term goals separately -- and hopefully you can afford to do both, at least to some degree.

Edited November 17, 2009 by Kevin20

[MrsRNA]

I spoke with an advisor at USAA and set up a mutual fund account.

[Operation_Home_Ownership]

I spoke with an advisor at USAA and set up a mutual fund account.

 

Err ofcourse they advised that, they want to make $$$ off of you. Not that you had to heed the MM/HYSA advice given, but...

 

You will see the error when you go to take out the money for your downpayment in short time.

[Nummerkins]

The only place you should really be putting the money is into an FDIC insured High Yield Savings or Money Market account. When it comes time to withdraw for the downpayment, you want it to all be there and then some. Putting it into a mutual fund is not wise - yes it could go up, but it's just a likely you will lose a chunk of it.

Edited November 24, 2009 by Nummerkins

[TroyP]

The only place you should really be putting the money is into an FDIC insured High Yield Savings or Money Market account. When it comes time to withdraw for the downpayment, you want it to all be there and then some. Putting it into a mutual fund is not wise - yes it could go up, but it's just a likely you will lose a chunk of it.

 

I disagree. With a 5 to 10 year horizon for a home purchase, I think its important in this environment to be diversified financially. I'd invest in a mix of corporate bonds, mutual funds, and CDs, and I'd invest in a more conservative manner as I got closer to my home purchase.

 

A money market account is great if you're planning on buying a home next year or even two or three years out, but with 5 or 10 years to work with, you can afford to take some risk as long as you don't get greedy.

[smart1n]

I am going to go against the grain here (well some of it anyway) and argue against the 20 % downpayment unless you can afford it. I am in the process of saving up for a home myself, which I hope to purchase next year if the stars align. I am going with the NACA program since I don't need a downpayment and the money that I am saving for a traditional 20% downpayment will be dispersed into the following "home funds" I have created on my excel spreadsheet:

 

 

 

Home Repair Fund

Home Maintenance Fund

Property Taxes Fund

Home Insurance Fund

Home Insurance Deductible Fund

Moving Expenses Fund

Home Improvement Fund

 

In my opinion its not about the downpayment, it's about being able to afford the true costs of owning a home and keeping it. I am using my funds to keep the home.

 

Also don't forget about iBonds in your portfolio I believe the blended rate is 3.62 % now.

[MrsRNA]

I didn't realize the first time buyer exception was limited to $10,000.

 

I spoke with an advisor at USAA and set up a mutual fund account.

 

Err ofcourse they advised that, they want to make $$$ off of you. Not that you had to heed the MM/HYSA advice given, but...

 

You will see the error when you go to take out the money for your downpayment in short time.

I'm not sure how they're just trying to make money off me, there are no sales fees and even taking into account the expense ratio, the fund I chose still has been earning more than any MM or HYSA I found.

 

I am going to go against the grain here (well some of it anyway) and argue against the 20 % downpayment unless you can afford it. I am in the process of saving up for a home myself, which I hope to purchase next year if the stars align. I am going with the NACA program since I don't need a downpayment and the money that I am saving for a traditional 20% downpayment will be dispersed into the following "home funds" I have created on my excel spreadsheet:

 

 

 

Home Repair Fund

Home Maintenance Fund

Property Taxes Fund

Home Insurance Fund

Home Insurance Deductible Fund

Moving Expenses Fund

Home Improvement Fund

 

In my opinion its not about the downpayment, it's about being able to afford the true costs of owning a home and keeping it. I am using my funds to keep the home.

 

Also don't forget about iBonds in your portfolio I believe the blended rate is 3.62 % now.

Our goal isn't necessarily 20% down, we're just not at a point either financially or in our careers where we're ready to buy so we're saving for when we are. NACA is a great program but we most likely won't be able to take advantage of it because I know we won't live in the home for the whole length of the mortgage and I don't know if we would be able to fulfill the membership requirements unless we don't buy until after we retire.

[Operation_Home_Ownership]

I didn't realize the first time buyer exception was limited to $10,000.

 

I spoke with an advisor at USAA and set up a mutual fund account.

 

Err ofcourse they advised that, they want to make $$$ off of you. Not that you had to heed the MM/HYSA advice given, but...

 

You will see the error when you go to take out the money for your downpayment in short time.

I'm not sure how they're just trying to make money off me, there are no sales fees and even taking into account the expense ratio, the fund I chose still has been earning more than any MM or HYSA I found.

 

They make more money off the management of that account type BUT you are missing the point...

 

Yes, you may experience a higher return on your money saved, but you do not have the liquidity of pulling the entire balance in short time. Mutual funds are not short term investment vehicles to park money when needed for downpayment. It's already done as you did not heed warning, but please let us know when you go to pull the funds how it turns out.

 

I bet you will not be pleased with the roadblocks you will run into.

[Kevin20]

I didn't realize the first time buyer exception was limited to $10,000.

 

I spoke with an advisor at USAA and set up a mutual fund account.

 

Err ofcourse they advised that, they want to make $$$ off of you. Not that you had to heed the MM/HYSA advice given, but...

 

You will see the error when you go to take out the money for your downpayment in short time.

I'm not sure how they're just trying to make money off me, there are no sales fees and even taking into account the expense ratio, the fund I chose still has been earning more than any MM or HYSA I found.

 

They make more money off the management of that account type BUT you are missing the point...

 

Yes, you may experience a higher return on your money saved, but you do not have the liquidity of pulling the entire balance in short time. Mutual funds are not short term investment vehicles to park money when needed for downpayment. It's already done as you did not heed warning, but please let us know when you go to pull the funds how it turns out.

 

I bet you will not be pleased with the roadblocks you will run into.

 

You are incorrect OHO. The OP can certainly liquidate their entire USAA mutual fund position at any time almost immediately (actually at end of day after market closes is when mutual fund trades occur).

 

Further, USAA is an outstanding institution beloved by their clients, they don't screw people over.

 

OP's only risk with that is being invested in the risk markets as opposed to an insured low-interest savings account, but I'd agree with Troy P that that is appropriate given the fairly long time horizon.

[Operation_Home_Ownership]

I didn't realize the first time buyer exception was limited to $10,000.

 

I spoke with an advisor at USAA and set up a mutual fund account.

 

Err ofcourse they advised that, they want to make $$$ off of you. Not that you had to heed the MM/HYSA advice given, but...

 

You will see the error when you go to take out the money for your downpayment in short time.

I'm not sure how they're just trying to make money off me, there are no sales fees and even taking into account the expense ratio, the fund I chose still has been earning more than any MM or HYSA I found.

 

They make more money off the management of that account type BUT you are missing the point...

 

Yes, you may experience a higher return on your money saved, but you do not have the liquidity of pulling the entire balance in short time. Mutual funds are not short term investment vehicles to park money when needed for downpayment. It's already done as you did not heed warning, but please let us know when you go to pull the funds how it turns out.

 

I bet you will not be pleased with the roadblocks you will run into.

 

You are incorrect OHO. The OP can certainly liquidate their entire USAA mutual fund position at any time almost immediately (actually at end of day after market closes is when mutual fund trades occur).

 

Further, USAA is an outstanding institution beloved by their clients, they don't screw people over.

 

OP's only risk with that is being invested in the risk markets as opposed to an insured low-interest savings account, but I'd agree with Troy P that that is appropriate given the fairly long time horizon.

 

I was referring to the penalties and taxes that will have to be settled for pulling out short term.

[TroyP]

I didn't realize the first time buyer exception was limited to $10,000.

 

I spoke with an advisor at USAA and set up a mutual fund account.

 

Err ofcourse they advised that, they want to make $$$ off of you. Not that you had to heed the MM/HYSA advice given, but...

 

You will see the error when you go to take out the money for your downpayment in short time.

I'm not sure how they're just trying to make money off me, there are no sales fees and even taking into account the expense ratio, the fund I chose still has been earning more than any MM or HYSA I found.

 

They make more money off the management of that account type BUT you are missing the point...

 

Yes, you may experience a higher return on your money saved, but you do not have the liquidity of pulling the entire balance in short time. Mutual funds are not short term investment vehicles to park money when needed for downpayment. It's already done as you did not heed warning, but please let us know when you go to pull the funds how it turns out.

 

I bet you will not be pleased with the roadblocks you will run into.

 

You are incorrect OHO. The OP can certainly liquidate their entire USAA mutual fund position at any time almost immediately (actually at end of day after market closes is when mutual fund trades occur).

 

Further, USAA is an outstanding institution beloved by their clients, they don't screw people over.

 

OP's only risk with that is being invested in the risk markets as opposed to an insured low-interest savings account, but I'd agree with Troy P that that is appropriate given the fairly long time horizon.

 

I was referring to the penalties and taxes that will have to be settled for pulling out short term.

 

Lets presume OP's tax rate is 20%, and plans on holding onto her money for 7 years.

 

There are no "penalties" for pulling out of a mutual fund short term. Any realized gain on the sale of the mutual fund will be subject to tax at the prevailing capital gains tax rates (5% or 15% right now depending on your income), though any interest earned in a savings account would be subject to tax at ordinary income rates (which are generally higher) as earned. Importantly, only the gain is taxed when you withdraw the money, so if you invest $10,000, and it grows to $15,000 (which is a conservative estimate ifor a diversified mutual fund over 7 years), you'd currently pay an income tax of 15% only on the gain of $5,000 in the year you liquidated your interest in the fund. The OP would owe $750 with their taxes in this scenario, but would have earned $4,250 net of taxes on their money.

 

You run into penalties and hefty income tax bills when you stick the money in a 401(k) and sometimes in an IRA, because you can't pull your money out of a retirement plan early without paying penalties. In an ordinary investment account, you don't get a tax deduction for contributing to it, so there is no penalty for pulling your money out. In a 401(k) a withdrawal would be taxed at the OPs ordinary income tax rate (lets presume that's 20%) on the entire balance, plus a 10% penalty for early withdrawal. So in this scenario, the OP would owe $4,500 when pulling out $15,000.

 

If you were to park the money in a savings account earning lets say 5% (which would be a pretty outstanding rate given the current rates) interest over the next 7 years, she would have to pay income tax at a 20% rate on the interest she earned each year. At the end of the period, she'd have about $13,500, having paid around $700 in interest, spread over the 7 years.

 

Of course, tax rates are subject to change, and returns aren't guaranteed. Its difficult to say if the OP would earn 5% average return in a savings account over the next 7 years, and there is obviously no guarantee the stock market will return 50% over the next 7 years).

[smart1n]

Mrs. RNA

 

Follow this simple rule and you should be fine. Don't put all of your eggs in one basket. You very well may be able to make a lot of money in mutual funds and stocks and you can lose the same amount of money. Since you have a 5 -10 year horizon, I think you should split your savings between cash equivalents (I-Bonds, High Yield Checking/Savings, CD's), Mutual Funds (Index Funds would be a good choice as well) and stocks. If your unwilling to do the research on the stocks (due to time or its just not your thing) then skip the stock suggestion. If it were me, I would do a 60/40 on your savings with 60% going to cash equivalents and 40% going toward investments. This way if your mutual funds take a dive, your not as affected as if you had invested 100% of your savings for your goal.

 

btw I misspoke on IBonds: The current blended rate is 3.36%. The best part about I-Bonds is they are indexed for inflation so you should not lose the value of your dollar. Also what I like about IBonds right now is you don't have to do all of this extra stuff that you may have to do with high yield accounts (deposit requirments, debit card requirements, etc). You just set it and forget it.

 

Good Luck to you.

[TroyP]

Mrs. RNA

 

Follow this simple rule and you should be fine. Don't put all of your eggs in one basket. You very well may be able to make a lot of money in mutual funds and stocks and you can lose the same amount of money. Since you have a 5 -10 year horizon, I think you should split your savings between cash equivalents (I-Bonds, High Yield Checking/Savings, CD's), Mutual Funds (Index Funds would be a good choice as well) and stocks. If your unwilling to do the research on the stocks (due to time or its just not your thing) then skip the stock suggestion. If it were me, I would do a 60/40 on your savings with 60% going to cash equivalents and 40% going toward investments. This way if your mutual funds take a dive, your not as affected as if you had invested 100% of your savings for your goal.

 

btw I misspoke on IBonds: The current blended rate is 3.36%. The best part about I-Bonds is they are indexed for inflation so you should not lose the value of your dollar. Also what I like about IBonds right now is you don't have to do all of this extra stuff that you may have to do with high yield accounts (deposit requirments, debit card requirements, etc). You just set it and forget it.

 

Good Luck to you.

 

I agree with this advice. My previous post was merely to indicate the tax implications of different savings methods. Diversity is a key component in a portfolio, regardless of the purpose. While the OP's time horizon is longer than most for a home purchase, diversification would be very prudent.