$20k raise - what to do with it?

[EJ]

Just received a $20k raise and want the MMM community's help in how to allocate.

-Single income $130k
-Stay at home wife (both 30yo)
-Two kids (age 2&nb)

All % below are % of gross income
-5% to 401k (3% company match)
- 8.5% ($11k) to Roth IRA annually
-10% to ESPP (sold immediately ea yr and invested in brokerage account to take advantage of 18% gain)
-14% to house down pymt acct (18k per yr)
-3% to misc savings

Assets
401k $85k
Roth IRAs $50k
House fund (cash) $35k
Cash reserves (maintenance, emergency etc) $5k
Home equity $25k

Liab
Student loans $11k (@1.75%)

Currently saving approx 40% of income. We own a home and also have two paid for cars (anti mustachian, I know). Looking to move in 3 years (targeting a 20% down payment of $80k).

Question: should I pour more money in to 401k for the tax advantages?  Should I pile up as much cash as possible for down payment?

Tried to be clear in my situation. Let me know if additional info is needed. Thanks!

[twinge]

Congrats on the raise! Are you holding off on purchasing a house because of time to accrue down payment or because of other factors?  If just the former, since interest rates are at a low now so I might push ahead on down payment to get there faster and keep an eye on interest rates.   If owning a home is more a flexible option (e.g., you'll assess whether it's a good option in 3 years time vs. renting) I would max out your 401k to maximize tax advantages.  Also consider 529 plans for kids if planning to pay any for college.

[freelancerNfulltimer]

If you're not maxing out your 401k and you're two choices are that and savings for a downpayment, why not go the 401k route. You can always borrow against your 401k for a downpayment.

[mobilisinmobili]

If I was you I'd not increase standard of living at all.

Max the 401k for tax benefits. Take 80% of the money remaining and put it into a different type of investment account. Use the other 20% for objects / experiences that will make you happy / serve your goals.

So 20,000 - x(amount required to max out 401k) = Y

Take 80% of Y into other investments. 20% of Y for money for goals, travel, upkeep, something nice, etc.

If you wanna be hardcore, use the remaining 20% to up the amount of the student loan payments so you're debt free. At such a low percentage of interest, you're better off having it in investments overall, but psychologically having no debt might be a boon.

[ghatko]

Looking to move in 3 years (targeting a 20% down payment of $80k).

Why are you looking to move in 3 years? I'm speaking from experience here, but you probably don't need to upgrade to a $400k house. We did, and looking back on it, I kind of regret that decision. Don't get me wrong, I love our new house, and the location is much better for my commute, but our other housing expenses (heat, maintenance, etc) have dramatically increased. Financially it would have made a lot more sense for us to stay put, and sock away most of our income (and even with the new house we are somewhere around a 50% savings rate). If only MMM had been around then we could have made a smarter decision! So my 2 cents is to stay put, and put that downpayment money into investments.

[nofool]

How are you contributing $11k to your Roth IRA, if your wife has no income? Limit is $5500 for 2013.

[Zaga]

How are you contributing $11k to your Roth IRA, if your wife has no income? Limit is $5500 for 2013.

Spouses can contribute even without earned income.

[NumberJohnny5]

How are you contributing $11k to your Roth IRA, if your wife has no income? Limit is $5500 for 2013.

You can use your spouse's income.

Edit: ugh, too slow!

[nofool]

Oh, cool. Didn't know that, glad to have learned something new today.

[DK]

If you currently own a house, why are you looking to get a new one? What are you going to do with your current house if you do buy a new one, turn it into rental? sell it? If you plan on selling it, I would imagine you're already at your 20% and potentially more to make your down payment and take advantage of historic lows on interest rates. Personally it seems a 450K house is a bit excessive, especially with your pay, it's around 3.5x your gross salary.

Outside of the house aspect, the raise will most likely bump your taxable income into the next bracket, if it isn't in the 25% already, so I would focus on putting some money into the 401k reduce your tax liability.

I'd keep the student loan since it has such a low rate. I'm in the same boat as you there, I consolidated mine after graduation and have the same rate you do. I'll keep that as long as I can.

One thing you might want to consider with the money and savings rate you have, is go into early retirement mode since I'd bet 10 years down the road you would have enough investment income to live off of. It's a bit of delayed gratification, but if you go the new house route, you're going to be waiting a longer time to be able to retire.

[tylerherman]

Max 401k seems like a no-brainer. Not sure what to do with the rest, taxable account I guess.

Maybe look into rental property.

[AJ]

If you're not maxing out your 401k and you're two choices are that and savings for a downpayment, why not go the 401k route. You can always borrow against your 401k for a downpayment.

+1

I'm not sure what your taxes look like since you have deductions for the children I do not, but if you still find yourself in the 25% bracket I would max out the 401k with the intention of borrowing against it for the down payment. YMMV, but the rules for my 401k are that you can borrow up to 50% of the value, and no more than $50k, so you'd need to save the other $30k in taxable accounts. Still, though, it lets you take advantage of the tax savings while still saving for the down payment.

[EJ]

If you currently own a house, why are you looking to get a new one? What are you going to do with your current house if you do buy a new one, turn it into rental? sell it? If you plan on selling it, I would imagine you're already at your 20% and potentially more to make your down payment and take advantage of historic lows on interest rates. Personally it seems a 450K house is a bit excessive, especially with your pay, it's around 3.5x your gross salary.

Poor first home purchase. On a busy street with poor layout for our expanding family. We may consider a 300-350k home with a layout we like and upgrade as necessary.

[Nathan Drake]

Definitely go with maxing out 401k IMO.  Good job on everything else!