A couple of questions:
Kevinm1986 wrote:Then, of course, there's the whole buying vs. owning a house debate.
I'm afraid I don't quite understand what is meant by this.
You have to decide whether buying or renting a house is the better decision, and it isn't so clear; it depends on a variety of factors. There are several other discussions on this board.
Taylor Larimore wrote:It is true that your Target Retirement 2045 Fund will not make large taxable distributions in the early years, However, in later years, when the fund becomes much larger and bond heavy, your fund will distribute large distributions each year mostly taxed at income tax rates.
The problem will come when you want to switch to a permanent tax-efficient fund. At that time, you will pay a capital gain tax on all your profit leaving that much less to reinvest.
Does this mean that switching from TR2045 to some other fund in 5 years from now would not make large taxable distributions, since TR2045 in 5 years would have pretty much the same amount of bonds as TR2040 has now? Both TR2045 and TR2040 have less than 10% in bonds now.
If you buy and hold TR2045, it won't make large taxable distributions now, but it will eventually shift to holding more bonds and those distributions will be taxable. But if you buy TR2045 now and sell it in five years, you'll pay capital-gains tax on all of the fund's gains, even if you reinvest in the individual funds that it holds, or in another fund which has the same holdings.
This is why you don't want to hold a balanced fund in a taxable account. If you have both stocks and bonds in the same fund, you have to sell stocks in order to change your bond holdings, and you will pay an unnecessary tax bill.
In contrast, if your first taxable investment is Total Stock Market, or FTSE All-World Ex US, you won't need to sell that fund as long as you have the money invested. The amount you hold in Total Stock Market may vary over time, but the fund will still belong in your investment plan.
3. Also, is there any regulation about using 401(k) funds for buying a home without penalties, or that would be considered as early withdrawal?
Some 401(k) plans allow you to take a loan from the plan for buying a home; do this only if your job is secure, as you will have to pay off the loan immediately if you leave your job, or else the outstanding loan will be converted to an early withdrawal and a big tax bill. You can make limited Roth IRA withdrawals for a first-time home purchase.