Opinions needed

[snobunni74]

31-year-old, single mom with a 2-year-old.

 

No 401k.

 

Wants house. Preferably by the time child starts Kindergarten.

 

Invest in 401k first?

Invest in house first?

 

(Employer contributes 6.2% of annual salary every year starting this October [my 2 year anniversary of employment], regardless of employee contribution. So that is not a factor.)

 

I can provide more insight if needed. I'm trying to word this so that it is not biased one way or the other.

 

Thanks.

 

R-

Edited February 7, 2005 by snobunni74

[Keishala]

Unless there's a company match above their 6.2% contribution, I'd open a Roth IRA. You can withdraw the money from that penalty-free for a downpayment on your home. If you withdraw within 5 years, you'll have to pay taxes though...

 

http://www.fairmark.com/rothira/first.htm

[bfarber]

I think the OP was saying the employer contribution was 6.2% of her annual salary, regardless of what she put in.

 

You can do the same thing with a 401k (contribute, then pull money out for a downpayment on a house). I would go with a 401k myself. I'm not up to speed on IRA's, but with a 401k, you have an employer matching your contribution (and any EXTRA money above what you put in is always welcome, eh?)

[snobunni74]

I think the OP was saying the employer contribution was 6.2% of her annual salary, regardless of what she put in.

 

<{POST_SNAPBACK}>

 

Yes, that's exactly what I was saying.

 

I definately don't want to be living with my parents for 5 more years.

 

And I had thought all along that 401k was a better idea, but then a whole bunch of people were telling me that houses earn value far faster than 401k's. Maybe in California, but not necessarily around here. Their logic just didn't make sense to me. But I was wondering if I was missing out on some hidden secret that everyone else knew about.

 

R-

[bfarber]

Well, it all depends.

How old are you? Do you have any other savings?

 

If you are really young (pre 30's) I'd almost recommend going after a house. But then again, I'm 21, and I'm pursuing a 401k now, and I'll look at a house (money will come from outside of 401k when I'm ready) in a few years.

 

All depends on what you can do and what you WANT to do.

[really trying]

I was struggling with the same question but I am 10 years older than you. I lived for years in an area where the cost of living was so high that I could never put anything into a retirement account. Three years ago we moved and I started putting 8% of my income into a 403(. My employer matches 50% on the first 5% of my income that I saved. I knew I wanted to buy a house and was really torn about how to save for retirement and a house. I guess the turning point for me was when I realized that (usually) a house is just as much of an investment in my future as the 403(. I withdrew some of my retirement money to help make the purchase of a house. My paycheck is stretched so tight it squeeks and I had to reduce my retirement contribution percentage to 5% for awhile but I do have the security of knowing that this house will be paid off a couple of years before I retire. That provides me a lot more peace of mind than the extra $200 a month going into my account. Also, I plan to reinvest any pay raises back into the 403b. JMHO!

[bfarber]

That's an EXCELLENT strategy in all honesty. The value of homes generally appreciate, and it's better to have your home paid off BEFORE retirement of course.

 

Age makes a big difference in your strategy in this case. Because I'm so young, and planning ahead, I have a lot of options. Once you reach mid 30's or so though, you really have to buckle down and decide. If you don't start saving early enough for retirement, you will find yourself in a situation you don't want to be in when you are older.

[rpatty]

Why not do both at the same time? Most financial experts recommend that if you're putting away 10% to 15% of your income on a yearly basis, it should lead to a good retirement. (I like 15%, but I want to retire well--just pick a number that you like and run with it.) Make sure you put that much towards retirement (as much of it as possible should be pre-tax), and then put everything else you can manage in the fund for your house.

 

They're both important investments, and they both take a lot of resources, but neither one of them is something you want to ignore for too long. Retirement gets you great tax benefits, and you get absolutely tremendous growth from the money if you can put it in early. The longer you wait, the harder it is. But houses mean your monthly rent money goes towards equity rather than towards a landlord, and that's pretty nice, too. That's why I tend to think of them as equally important, and want to make sure both bases are covered.

[stormblade]

I would agree with rpatty - why not do both? Buy the house and cut back a little on the retirement plan if you have to so that you can make the payments and then when you get a raise, bump up the retirement plan.

 

The house will likely appreciate on the whole more steadily than a 401K (ask those who had 401K's between 2000 and 2003). Plus, as bfarber said - paying off the house before retirement is a really good idea.

[hegemony]

you really need to do both 401K contributions and save for a house. these are not mutually exclusive. failure to start savings in a 401k early results in a huge opportunity cost.

[madflower]

You can borrow against what you put in as principal to both your house and your 401k, or Roth.

I would highly suggest using and IRA and supplement your 401k savings. The issue is really that you want to diversify your 401k holdings. You don't want your retirement to be locked up in one single 401k investment.

 

Being that you can only put 3k in for last year up until the 15th of april and 4k into your roth for this year. I would probably go that route. which could give you 7k to borrow against.

 

Also, since you are a single parent with a child, and female, and I assume fairly mid-low income (forgive this assumption but you are living with your parents.). You should be able to qualify for some first time homeowner grants, find them and use them. there are usually federal, state and sometimes local grants available, and you can apply for and use more then one.

 

The beauty of a house is it is a built-in savings plan and saves you rent money and you get a nice tax deduction. Living with your parents sucks, but you should be packing away a ton of money ie like about half your income per month.

 

I would HIGHLY recommend, learning investing and investing strategies. so you will have 2-4 years living at home, but you should be able to make 10-15+% interest on your Roth money before you remove it which means when you do remove that money you will still have money to work with in that account after you buy your house.

 

Personally I did it the other way, I matched my 401k, then my roth then i created a rainy day fund, which i invested with. They earning on that paid for my house downpayment.

 

Having a house is typically a good conservative investment. you figure 3-5% per year increase in value, on borrow money plus you are your own landlord, and it is a forced savings plan. I never quite figured out why people were in a hurry to pay off their house with interest rates so low.

[54regcab]

As a single mom you aren't probably paying any taxes now. Putting money into a 401k instead of a Roth IRA to "defer" taxes you aren't paying anyways makes little sense. Take the 6.2% from your employer and put the remaining retirement funds into a Roth IRA.

[breeze]

As a single mom you aren't probably paying any taxes now. Putting money into a 401k instead of a Roth IRA to "defer" taxes you aren't paying anyways makes little sense. Take the 6.2% from your employer and put the remaining retirement funds into a Roth IRA.

<{POST_SNAPBACK}>

 

Why wouldn't a single mom be paying taxes? That's a big big assumption.

[breeze]

401k plans have rules - yes you can borrow the money that is yours (vested) to put down on a house, but if you leave your job, you either have to pay it back immediately, or it is treated as a distribution. I've been caught in that, and you don't want it, it's expensive, and the money goes to Uncle Sam.

 

There are many programs to help with or eliminate down payments, and closing cosrs can be negotiated if the market isn't super hot. If real estate values are increasing any at all there, try to get in a house. It's susually cheaper (monthly payment) than rent. Interest is deductible, but maintenance and repairs are yours to pay.

 

There are not many places where real estate is not at least a decent investment - research it, and post in the mortgage forum to see what you might qualify for, and some of the gifting programs and neogitating for closing costs that can get you in a house for virtually no monry.

 

With the 401K - see about the house first, but then look at what the 401k can do for you. Many times, it lowers taxable income to the point that your take-home pay is the same or almost the same, so it has virtually no effect on your spendable income, but you are getting it instead of uncle sam.

 

My guess - you can do both. research the real estate, so you don't get stuck if it's a very very slow market, and cunch the numbers on what you takehome pay will be if you contribute different amounts to a 401k plan.

[54regcab]

As a single mom you aren't probably paying any taxes now. Putting money into a 401k instead of a Roth IRA to "defer" taxes you aren't paying anyways makes little sense. Take the 6.2% from your employer and put the remaining retirement funds into a Roth IRA.

<{POST_SNAPBACK}>

 

Why wouldn't a single mom be paying taxes? That's a big big assumption.

<{POST_SNAPBACK}>

 

Breeze, the vast majority of single mom's get back more than they pay in. This isn't ALWAYS the case, but it is more times than not. Even if she is paying some taxes, it's likely that her tax rate will be higher when she retires than it is currently (especially since she has a PLAN for retirement), this makes the ROTH a better option than 401K IMHO.

The tax free growth of the ROTH is of more benefit to her than defering what little taxes she would save today. Keep in mind with a ROTH all the growth is tax free and the withdraws are tax free at retirement.

Edited March 14, 2005 by 54regcab

[breeze]

My point was that there is a point with a 401k contrivution, where it does not change your take home pay. A Roth contribution would lower her take home pay.

 

Some single moms make good money and could use a tax break - even a small one. You know what they say about assuming things.

[54regcab]

Breeze, contributing beyond the free employer contribution to a 401K does change take home pay. the money is just taken out before taxes. Of course it's just plain stupid tax IMHO to give up a free match unless you are behind on bills.

 

A Roth IRA is taken after taxes, the growth is tax free and the withdraws are tax free at retirement.

A 401k is taken before taxes, the growth is tax defferred but the retiree must pay taxes on the withdraws.

If her tax rate is lower now than she thinks it will be when she retires the ROTH is a better plan. Since she lives at home income is probably low enough that she isn't paying much if any taxes now, so getting a tax break now really doesn't mean much. But she has a PLAN to retire with dignity so she most likely will be paying taxes in retirement. She is getting a HUGE tax break now for being a single mom, it would be silly not to take full advantage of it

BTW there is also a tax credit for low income earners where the government reimberses up to 1/2 what you contribute. There is a good possiblity if she is paying taxes that this credit could eliminate what she does pay. See IRS.gov for details.

Edited March 14, 2005 by 54regcab

[breeze]

I have done it and set it up for others, so I beg to disagree. I've been in one area of financial services for many years. In many cases, it works great, does not work in every case, but is something worth considering, as are all the suggestions so far.

[54regcab]

Breeze, please be more specific on the problems you have had with Roth IRA's os we will know what to watch for.

[Skipper12]

And I had thought all along that 401k was a better idea, but then a whole bunch of people were telling me that houses earn value far faster than 401k's. Maybe in California, but not necessarily around here. Their logic just didn't make sense to me. But I was wondering if I was missing out on some hidden secret that everyone else knew about.

<{POST_SNAPBACK}>

 

snobunni,

 

Even in an area where real estate is moving up at the inflation rate, the money used to purchase a home usually will go up faster than a 401k.

 

The hidden "secret" you're alluding to maybe the power of leverage most people use when purchasing a home.

 

I hope that makes sense to ya?

 

Take care,

Skipper

[Tigz]

I agree pretty much on most that is said (excluding the statement about single mothers not paying hardly any tax...it depends on your income)

 

I did want to add one thing about home ownership though. Remember that property usually increases in value and is a good investment. However you do need to factor in repair and replacment costs as time goes on. Especially remember this when it is time to buy. A less expensive old house could end up costing you considerably more in both the short the long run than spending a little more for a newer house. It is pretty much a given that not everyone can go out and buy a brand spanking new house. But do make sure to consider what it is going to cost to live in the house and how much you are going to need to budget in for repair. Some older homes are extremely well maintained, but others are not (and sometimes it isn't something you can see at first glance)...so make sure you really check it out before you buy including researching its average utility bills.

 

Best wishes on your savings for both your retirement and your house! The fact that you are thinking about these things now suggests you have a pretty good head on your shoulders.

[54regcab]

I agree pretty much on most that is said (excluding the statement about single mothers not paying hardly any tax...it depends on your income)

<{POST_SNAPBACK}>

 

1/2 of single mother live below the poverty line, NONE of them pay taxes. Some of the single mothers above the poverty line do pay taxes but they normally don't amount to much. Yes there are a few single moms with excellent incomes that do pay taxes but they are the exception.