Low income... Contribute more 401k or save towards first home?

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workingovertime
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Low income... Contribute more 401k or save towards first home?

Post by workingovertime » Mon Feb 01, 2016 8:39 pm

I'm 25. I'm on track to make about $35,000 this year; however, I'm lucky enough to stay in a family home as of now. I can save about 10,000 - 15,000 this year. I do get a company 401k match of 4%, which I will (and have been) contribute that much at the very least, no brainer. On the other hand, I would love to save up for my first home down payment. I don't want to miss out on saving on my 401k account during these precious early years, but I also want to start being on my own starting with my own home. My 401k is mostly equity. I'm looking for advise. Thank you.

JDot
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Re: Low income... Contribute more 401k or save towards first home?

Post by JDot » Mon Feb 01, 2016 8:46 pm

It really depends. You certainly came to dare I say the very best place to obtain good advice. I would first propose that you take a long hard look at whether buying a home at all is the thing to do. Not necessarily because of anything you have in your original post but just in general.

Did you know that they found during the last recession that home ownership was associated with higher unemployment? The theory is that people who were less mobile because of home ownership could not move to a place w/ job opportunity.

I could certainly come up with a scenario where it would make sense for you to do either option. But you haven't given us enough information. If I were forced to make a decision with what you've given us I'd say make sure you had an emergency fund and then up your 401k contribution.

Best wishes.

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Phineas J. Whoopee
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Re: Low income... Contribute more 401k or save towards first home?

Post by Phineas J. Whoopee » Mon Feb 01, 2016 8:53 pm

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PJW

investor1
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Re: Low income... Contribute more 401k or save towards first home?

Post by investor1 » Mon Feb 01, 2016 8:54 pm

I would recommend opening up a Roth IRA and contributing the max to that for at least a few years. You can withdraw your contributions (not the growth) from a Roth IRA whenever you wish, and you can withdraw up to $10k from a Roth IRA for the purchase of a home. If you sock away money here, you'll have time to make up your mind whether you want this money to go toward retirement or a house without foregoing your tax advantaged space.

Similar to an IRA, you can withdraw up to $10k from a 401k for a home purchase, so either way, put the money into a retirement account for now and make up your mind later.

hnzw rui
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Re: Low income... Contribute more 401k or save towards first home?

Post by hnzw rui » Mon Feb 01, 2016 9:42 pm

investor1 wrote:Similar to an IRA, you can withdraw up to $10k from a 401k for a home purchase, so either way, put the money into a retirement account for now and make up your mind later.
There's no such exemption for 401k. You can take a hardship distribution but iirc, that's still subject to penalty. Also, I think you might be blocked from contributing to the 401k for a certain period after you take the distribution. However, you can usually take a loan for $50K or 50% of account balance whichever is smaller. Personal loans are usually limited to shorter time frames (e.g. 5 years) but if you use the funds for a home purchase, I think most plans allow for longer repayment (e.g. 10-15 years).

At $35K income, contribute to Roth IRA and Roth 401k.

Houses are too expensive where I live (need $100-150K down to avoid PMI) so I've stopped saving dedicatedly in a low interest savings account for home purchase and switched my focus to maxing out the retirement accounts so as not to waste precious tax advantaged space. If the opportunity presents itself, I'll just take a loan from my 457. Granted, our 457 is more flexible than a 401k so it's not as big of a risk in case of unemployment, switching employers, etc.

investor1
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Re: Low income... Contribute more 401k or save towards first home?

Post by investor1 » Mon Feb 01, 2016 10:54 pm

hnzw rui wrote:
investor1 wrote:Similar to an IRA, you can withdraw up to $10k from a 401k for a home purchase, so either way, put the money into a retirement account for now and make up your mind later.
There's no such exemption for 401k.
Ah, good catch! I stand corrected.

jjface
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Re: Low income... Contribute more 401k or save towards first home?

Post by jjface » Mon Feb 01, 2016 11:02 pm

Roth IRA sounds good to me.

Also consider renting your own place first before going straight into buying a house - you can easily end up losing out if life circumstances change or you buy in the wrong area/at the wrong time. Though you could easily end up not regretting it too! Just make sure you are ready to buy when you do so.

raveon
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Re: Low income... Contribute more 401k or save towards first home?

Post by raveon » Mon Feb 01, 2016 11:15 pm

My thinking is at 25 you are too young to get caught into buying a first house as it will tie you down to a specific locality. What if you get married and your spouse wants to live somewhere else? At that age, I would focus on career and (salary) growth potential. Maybe you'll find a better job which requires relocation, etc. Savings for retirement is an excellent idea at this time as you have a good 40-45 years ahead of you. I personally would give retirements savings a higher priority for now (and also make sure I don't have any debts).

2tall4economy
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Re: Low income... Contribute more 401k or save towards first home?

Post by 2tall4economy » Mon Feb 01, 2016 11:42 pm

I bought my first rental property at 25. Lived in half, rented half, and rented the second bedroom in my half. Beat the pants off the stock market. Beat the pants off living at home. Also was preferable to bring home a date to my roommate vs my parents.

To each their own I suppose.

I will 100% agree that buying your own place, for yourself only (no rental income) is a terrible idea vs staying at home rent free with mom and dad and building up your Roth space while you're in a nearly tax-free income level.
You can do anything you want in life. The rub is that there are consequences.

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dm200
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Re: Low income... Contribute more 401k or save towards first home?

Post by dm200 » Mon Feb 01, 2016 11:49 pm

2tall4economy wrote:I bought my first rental property at 25. Lived in half, rented half, and rented the second bedroom in my half. Beat the pants off the stock market. Beat the pants off living at home. Also was preferable to bring home a date to my roommate vs my parents.
To each their own I suppose.
I will 100% agree that buying your own place, for yourself only (no rental income) is a terrible idea vs staying at home rent free with mom and dad and building up your Roth space while you're in a nearly tax-free income level.
For some folks, I agree doing this (sharing a purchased home, not necessarily a duplex/etc.) can be a great idea, both financially and "lifestyle" (that is you can live in a bigger/nicer house by sharing expenses, as well as a tax benefit)

Dulocracy
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Re: Low income... Contribute more 401k or save towards first home?

Post by Dulocracy » Tue Feb 02, 2016 10:44 am

I am in the stuff the Roth IRA and 401k camp. How many years can you live with family? Perhaps you will want to start stuffing the retirement accounts, but then shift to 15% of income to retirement with the remainder to house savings. Getting money in that account early is a huge benefit to your future, however. I would not miss that opportunity.
I'm not a financial professional. Post is info only & not legal advice. No attorney-client relationship exists with reader. Scrutinize my ideas as if you spoke with a guy at a bar. I may be wrong.

workingovertime
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Re: Low income... Contribute more 401k or save towards first home?

Post by workingovertime » Tue Feb 02, 2016 5:25 pm

Thank you for all of the replies.

From the advises that I've gathered and my further research, this is what I plan to do:

I will continue to contribute 5% to my employee 401k to receive the match at the very least.
I will contribute majority of rest savings to the Roth IRA to achieve the maximum this year (which I know that I can achieve).

It should be few months for me to max out my Roth IRA. Only after I have maxed out my Roth IRA for the year, I'd want to see how I want to distribute those extra savings. I'd like to see where I am after that (both financially or emotionally about my choices). I may significantly increase my 401k or lean more towards saving for a first home. In summary, I plan on making Roth IRA my #1 priority.

surfstar
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Re: Low income... Contribute more 401k or save towards first home?

Post by surfstar » Tue Feb 02, 2016 5:37 pm

Before anyone else mentions it:
you have until 4/15/16 to fill your 2015 Roth, also. Do that one first!

TomCat96
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Re: Low income... Contribute more 401k or save towards first home?

Post by TomCat96 » Tue Feb 02, 2016 6:14 pm

Other posters correct me if I am wrong but,

at your income level 35k, saving 10-15k a year, putting the money in a retirement account is definitely advantageous because you can take the Retirement Savings Contributions Credit.

https://www.irs.gov/Retirement-Plans/Pl ... ers-Credit

Basically, if you contribute 10k into your 401k, your AGI should be 25k for the year. (35k - 10k contributions = 25K AGI)

Let's say that it is. At 25k your would be elligible for a tax credit worth 10% of your contributions up to 2000.

10% of 10000 is 1000, so you can get a 1000 tax credit.

Since your AGI is 25k, your standard deduction is 6300 and your personal exemption is 4000, your taxable income should be $14700, which means your tax should be $1748

Because you have a 1000 tax credit, your total tax for the year should be $748.

So to answer your question, if you contribute 10k into a 401k retirement account, in addition to your tax savings, that decision is worth at least $1000 more in cash than if you decided to save and invest the money.


So to summarize:

Situation 1: You make 35k and get taxed on 35k worth of income.
Situation 2: You put 10k and get taxed on 25k AGI, get 4% matching, and get an additional 1000 tax credit.

I would go with situation 2.

workingovertime
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Re: Low income... Contribute more 401k or save towards first home?

Post by workingovertime » Tue Feb 02, 2016 7:19 pm

TomCat96 wrote:Other posters correct me if I am wrong but,

at your income level 35k, saving 10-15k a year, putting the money in a retirement account is definitely advantageous because you can take the Retirement Savings Contributions Credit.

https://www.irs.gov/Retirement-Plans/Pl ... ers-Credit

Basically, if you contribute 10k into your 401k, your AGI should be 25k for the year. (35k - 10k contributions = 25K AGI)

Let's say that it is. At 25k your would be elligible for a tax credit worth 10% of your contributions up to 2000.

10% of 10000 is 1000, so you can get a 1000 tax credit.

Since your AGI is 25k, your standard deduction is 6300 and your personal exemption is 4000, your taxable income should be $14700, which means your tax should be $1748

Because you have a 1000 tax credit, your total tax for the year should be $748.

So to answer your question, if you contribute 10k into a 401k retirement account, in addition to your tax savings, that decision is worth at least $1000 more in cash than if you decided to save and invest the money.


So to summarize:

Situation 1: You make 35k and get taxed on 35k worth of income.
Situation 2: You put 10k and get taxed on 25k AGI, get 4% matching, and get an additional 1000 tax credit.

I would go with situation 2.
I've never heard of this, but after hearing from you, I just did my due diligence of research... I have a question though.

Of the 2 "situations" that you've presented, wouldn't I be able to take the "situation 2" either way. This tax credit states that it counts contributions towards both traditional 401k as well as Roth IRA. As stated on my last reply of this topic, I plan on making Roth IRA my #1 priority and then further accessing the situations once I have reached the maximum contribution. Not trying to sound like I'm starting an argument (I'm not, I just want to clarity) - but given that I would contribute max to my Roth IRA this year, wouldn't my situation be more like the "situation 2" either way? That would be a good thing for me regardless, since I would love to take advantage of this tax credit while lowering my AGI.

Given that I do make 35k and make the maximum contribution of $5,500 + whatever 5% 401k is, my AGI would still be less than $30,500. That would make me eligible for this tax credit, correct?

inbox788
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Re: Low income... Contribute more 401k or save towards first home?

Post by inbox788 » Tue Feb 02, 2016 7:56 pm

jb90304 wrote:I don't want to miss out on saving on my 401k account during these precious early years
Don't know if anyone has spelled it out clearly, but you're not missing out on much. The 401k is a tax deferred account, which means you pay taxes on it later. If you tax rate goes up, you actually pay MORE when you take things out. Like others have said, Roth is the way to go. That one you pay taxes on it now (which is low for you) and your gains are tax-free!

TomCat96
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Re: Low income... Contribute more 401k or save towards first home?

Post by TomCat96 » Thu Feb 04, 2016 2:46 pm

jb90304 wrote:
TomCat96 wrote:Other posters correct me if I am wrong but,

at your income level 35k, saving 10-15k a year, putting the money in a retirement account is definitely advantageous because you can take the Retirement Savings Contributions Credit.

Code: Select all

https://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Savings-Contributions-Savers-Credit
Basically, if you contribute 10k into your 401k, your AGI should be 25k for the year. (35k - 10k contributions = 25K AGI)

Let's say that it is. At 25k your would be elligible for a tax credit worth 10% of your contributions up to 2000.

10% of 10000 is 1000, so you can get a 1000 tax credit.

Since your AGI is 25k, your standard deduction is 6300 and your personal exemption is 4000, your taxable income should be $14700, which means your tax should be $1748

Because you have a 1000 tax credit, your total tax for the year should be $748.

So to answer your question, if you contribute 10k into a 401k retirement account, in addition to your tax savings, that decision is worth at least $1000 more in cash than if you decided to save and invest the money.


So to summarize:

Situation 1: You make 35k and get taxed on 35k worth of income.
Situation 2: You put 10k and get taxed on 25k AGI, get 4% matching, and get an additional 1000 tax credit.

I would go with situation 2.
I've never heard of this, but after hearing from you, I just did my due diligence of research... I have a question though.

Of the 2 "situations" that you've presented, wouldn't I be able to take the "situation 2" either way. This tax credit states that it counts contributions towards both traditional 401k as well as Roth IRA. As stated on my last reply of this topic, I plan on making Roth IRA my #1 priority and then further accessing the situations once I have reached the maximum contribution. Not trying to sound like I'm starting an argument (I'm not, I just want to clarity) - but given that I would contribute max to my Roth IRA this year, wouldn't my situation be more like the "situation 2" either way? That would be a good thing for me regardless, since I would love to take advantage of this tax credit while lowering my AGI.

Given that I do make 35k and make the maximum contribution of $5,500 + whatever 5% 401k is, my AGI would still be less than $30,500. That would make me eligible for this tax credit, correct?

Off the cuff, I believe you are correct in the sense that the 5500 Roth contribution would count for the purposes of the credit. But the biggest issue I believe is your income level. You're at the very border of being able to take the credit. The credit itself is available up to 2000 dollars. But because you're almost out of the income level of being elligible, you can only take a tax credit of 10 cents on the dollar of every dollar you contribute.
In other words if you contribute 5500, you can only get a 550 dollar credit, vs a 10k contribution for a 1000 credit.

The Big question is what is your AGI? I'll assume your 35k income wasn't an exact number, but a rounded number you cited for brevity.

If your AGI exceeds $30,500, you are totally inelligible for this tax credit.
You need to find a way to lower your AGI, and the easiest way to do that is contribute to your traditional 401k. Your ROTH IRA contributions wont lower your AGI.

In other words right now, with a 35k income, you can't take the credit at all. You need to affirmatively lower your AGI below 30500 first before the amount you contribute to the 401k or IRA even count for purposes of the tax credit.
Last edited by TomCat96 on Thu Feb 04, 2016 2:56 pm, edited 2 times in total.

psystal
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Re: Low income... Contribute more 401k or save towards first home?

Post by psystal » Thu Feb 04, 2016 2:51 pm

jb90304 wrote:Thank you for all of the replies.

From the advises that I've gathered and my further research, this is what I plan to do:

I will continue to contribute 5% to my employee 401k to receive the match at the very least.
I will contribute majority of rest savings to the Roth IRA to achieve the maximum this year (which I know that I can achieve).

It should be few months for me to max out my Roth IRA. Only after I have maxed out my Roth IRA for the year, I'd want to see how I want to distribute those extra savings. I'd like to see where I am after that (both financially or emotionally about my choices). I may significantly increase my 401k or lean more towards saving for a first home. In summary, I plan on making Roth IRA my #1 priority.
Bear in mind that you can make contributions to your 2015 Roth IRA until April 18 this year. After April 18, you can contribute to your 2016 Roth IRA. This way, if you're saving a lot, you won't hit the $5500 Roth maximum as quickly.

fourkids
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Re: Low income... Contribute more 401k or save towards first home?

Post by fourkids » Thu Feb 04, 2016 3:40 pm

Invest as much as possible in the 104k or Roth IRA while you are young and in a low tax bracket.
You can always take a 401k loan for the downpayment on a house later. Most 401k plans allow this and you pay yourself back with interest.

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