Down Payment or Taxable

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acquiredtaste04
Posts: 1
Joined: Fri Nov 15, 2019 6:19 pm

Down Payment or Taxable

Post by acquiredtaste04 » Fri Nov 15, 2019 6:48 pm

Recent reader, first time poster!

Some variety of this question is, I'm certain, asked constantly (most likely because it's not clear cut and, therefore, not easily answered), but here goes:

Early 30s, single physician just out of training.

HCOL area, yearly expenses currently at around $54,000
Renting a condo, but plan to buy in 3 years (maybe 2, but it would be unlikely)
Houses I am looking at currently are in the $1.8-$2.5 million dollar range (plan would hopefully be to purchase this house and then not have to go through the process again for a very very long time)

No debt
No health problems, robust disability insurance policy
No siblings, parents both alive and healthy, still working part time mostly for fun (making low six figure salary, mid seven figure savings, spend maybe $40-50,000 a year tops, so not likely to need my support any time soon)

Job is as stable as a physician job is likely to be (in demand specialty, get along well with my co-workers, good relationship between the physicians and the administration, practice is growing)
~$600,000 baseline compensation, likely will be closer to $700-$800,000 with productivity bonuses this year, probably somewhere near $1 million longer term (2-3 years). Potential for eventual income in the $1.5-2 million mark but honestly not sure I want to put in the hours to hit that.
Plan on maxing out 401k yearly, with employer contribution will be about $55,000 a year
Have put max into Roth IRA yearly since early on in training, plan to do Roth conversion for max going forward
Have an HSA started

37% federal tax bracket, 13% state tax bracket

Current savings:

~$70,000 in a savings fund earning about 1.6%
~$30,000 to date in 401k
~$70,000 in Roth IRA
~$16,000 in taxable
~$3,000 in HSA

Question is:

I'm torn between putting all my excess funds into my savings account for a down payment on an eventual house, versus splitting the money between savings and taxable investments. I think I'd like to have enough of a down payment to avoid PMI, so will need somewhere between $360,000 and $500,000, but even very conservatively just earning my base salary in 3 years I would accumulate more than this.

On the one hand, this is probably very borderline in terms of "too much house" for me to afford regardless, so it may be a good idea to take out as small of a mortgage as possible, get a 15-year rate and pay it off aggressively.

On the other hand, if I don't put anything in taxable for these first three high earning years, am I missing out on getting my taxable portfolio going and reaping the rewards of early(ish) investing?

(Am also aware that in a lot of ways this is an insane thing to worry about and that the sky isn't going to fall down no matter what I do, but regardless).

Thanks for the help and for reading!

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grabiner
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Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: Down Payment or Taxable

Post by grabiner » Sat Nov 16, 2019 5:31 pm

You can both invest in a taxable account and save for a down payment. In your tax bracket, the best taxable investment is CA municipal bonds, as you pay 53.8% tax on ordinary income and 36.8% even on qualified dividends. So you could put the money in Vanguard CA Intermediate-Term Tax-Exempt (and all stock in your other accounts), or even in CA Long-Term Tax-Exempt if you don't intend to use all the money for a down payment.

You don't want your muni duration to be much longer than your time horizon, but if you only intend to use part of the munis for a down payment, it won't be. If rates rise, your munis will lose value but have higher yields, and the part you don't use for your down payment will be earning those higher yields after you buy the house. You also retain the option of selling more munis than you need for the 20% down payment, if that is a better deal. (However, in a very high tax bracket, it's likely to be better to invest in munis while keeping a mortgage, at least to the extent that the mortgage interest is deductible.)
Wiki David Grabiner

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