Taxable vs 401k for house down payment ?

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Topic Author
rex
Posts: 72
Joined: Sun Nov 04, 2012 2:58 am

Taxable vs 401k for house down payment ?

Post by rex »

Hi fellow Bogleheads,

Need some advice here. DW and I are contemplating a home purchase 3-4 years down the road. We have 10% of the downpayment in cash and for saving the other 10% downpayment we were considering the following options:

1. Invest in a taxable account the $1000/month
2. Invest in a Roth 401K $1000 per month and take a 401k loan
--> currently invest 6% of my income in a regular 401k
3. Take a second loan for the other 10%


Some additional info:

1. We see house as a consumption item and do not wish to use any of my existing portfolio for that. We'd rather save up the rest of the money and buy whatever we can using that money.
2. We don't want to derail our current saving strategy , i.e., make less contribution to it:
--> 401k 6% for him
--> HSA max out for him
--> Roth IRA max out for him and her
--> $2000 per month in taxable

3. After the savings above, we have about $1500 left over - we want to save $500 cash and $1000 in some form of investment to keep up with inflation.


So the question is this - would putting the $1000/month in a Roth 401k and then taking loan for the down payment be a terrible idea ? The other options are to save this in a taxable account or take a second loan and keep the money invested in the Roth 401k .

Thanks,
Rex.

P.S. Some might question why not max out 401k before investing in taxable - well, we might need the money before 59 for early retirement.
Twins Fan
Posts: 2775
Joined: Fri Mar 08, 2013 12:02 pm

Re: Taxable vs 401k for house down payment ?

Post by Twins Fan »

You're talking a 3 - 4 year time frame here. How much inflation do you feel you will need to keep up with? We can't see the future, but I wouldn't be all that concerned about that part.

You say you put $2000/month in taxable now, you plan to put $500/month in savings, and then there's $1000/month left over that you want to decide what to do with. I see that as you have $3500/month to decide what to do with to work towards the house down payment. For one, I don't think a loan of any kind for the down payment should even be in the planning here with $3000/month extra. That just doesn't make sense to me.

Then, again we're talking a 3 - 4 year time frame here. How much in gains are you hoping for by investing $1000/month in that time. I can tell you that I put roughly that much per month into my deferred comp last year and it was only my second year contributing there, so a small balance. Even with last years great returns the gains were barely noticeable. It was still my contributions that made the difference in the balance going up. The magic of compounding isn't going to help you much with $1000/month in that time frame even with big return years.... that's IF... and what if it's a big down year 3 - 4 years from now.

I'm a simple guy, so I would simply divide that $3500/month up however you want between taxable and savings... 50/50, 60/40, or whatever. Just my opinion.
freddie
Posts: 920
Joined: Sat Feb 08, 2014 10:06 pm

Re: Taxable vs 401k for house down payment ?

Post by freddie »

You are making up rules that are costing you money. Use your existing taxable accounts (assuming the capital gains are reasonable) for the down payment and and max out that ROTH (or Traditional if that makes sense. Given a guess of your income and early retirment plans I am guessing the tIRA makes more sense), Getting the money out ranges from easy (contributions or traditional 401(k) to roth conversions), or annoying ( 72(t)'s). Odds are you will never need that 72(t) stage (i.e. it is hard to save enough money in a ROTH to retire at an age where you retire early enough where you need to get to the earnings. ). Take your case where your saving something like 42k/yr (2000+1500). Shoving 17k (would be less since you have 6% match) still leaves you 25k/yr in taxable. The cases where you need to touch any of the roth money before 59is going to be very low.

The advantages of having 700k in a roth versus 700k in a taxable when your 62 could be huge for things like ACA subsidies and at some point for taxes on SS and medicare copays. You need to be doing that planning today (and hope tax laws don't change too much).
rex wrote:Hi fellow Bogleheads,

Need some advice here. DW and I are contemplating a home purchase 3-4 years down the road. We have 10% of the downpayment in cash and for saving the other 10% downpayment we were considering the following options:

1. Invest in a taxable account the $1000/month
2. Invest in a Roth 401K $1000 per month and take a 401k loan
--> currently invest 6% of my income in a regular 401k
3. Take a second loan for the other 10%


Some additional info:

1. We see house as a consumption item and do not wish to use any of my existing portfolio for that. We'd rather save up the rest of the money and buy whatever we can using that money.
2. We don't want to derail our current saving strategy , i.e., make less contribution to it:
--> 401k 6% for him
--> HSA max out for him
--> Roth IRA max out for him and her
--> $2000 per month in taxable

3. After the savings above, we have about $1500 left over - we want to save $500 cash and $1000 in some form of investment to keep up with inflation.


So the question is this - would putting the $1000/month in a Roth 401k and then taking loan for the down payment be a terrible idea ? The other options are to save this in a taxable account or take a second loan and keep the money invested in the Roth 401k .

Thanks,
Rex.

P.S. Some might question why not max out 401k before investing in taxable - well, we might need the money before 59 for early retirement.
Topic Author
rex
Posts: 72
Joined: Sun Nov 04, 2012 2:58 am

Re: Taxable vs 401k for house down payment ?

Post by rex »

All good points - I really need to re-think my strategy here. thanks for sharing your thoughts guys.

I guess what really bothers me in maxing out 401k is that its a lot of money that's inaccessible for another 29 years....
freddie
Posts: 920
Joined: Sat Feb 08, 2014 10:06 pm

Re: Taxable vs 401k for house down payment ?

Post by freddie »

Why isn't it accessible? Assuming you don't want to pay the penalty, you either convert it to a ROTH or use a 72(t).

If you had zero dollars in taxable, there are some good arguments for building up a pile of money. Having zero dollars in taxable and 2 million in an IRA at 40 wouldn't be optimal but given your numbers you are far more likely to be in the 1 million/1million type split at best if you max out your tax advantaged space. Run your own number and see where you end up.

rex wrote:All good points - I really need to re-think my strategy here. thanks for sharing your thoughts guys.

I guess what really bothers me in maxing out 401k is that its a lot of money that's inaccessible for another 29 years....
NorCalDad
Posts: 774
Joined: Sun Mar 25, 2012 11:14 pm
Location: Northern California

Re: Taxable vs 401k for house down payment ?

Post by NorCalDad »

rex wrote:All good points - I really need to re-think my strategy here. thanks for sharing your thoughts guys.

I guess what really bothers me in maxing out 401k is that its a lot of money that's inaccessible for another 29 years....
You can withdraw from a 401k at age 55 if you follow the early retirement rules. How early do you plan on retiring, and how good are your 401k options?

I wouldn't put down payment money in the market if you need it to buy a house in the short term. There have been many threads here started by people who wanted higher yields for their down payment funds. But you have to accept the risk that your down payment fund may fall short of what you need when it's time to buy.
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