Author Topic: Down payment vs tax advantaged account, one or the other or both?  (Read 583 times)

kneelr

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I'm a new grad, just starting my first career job. I worked throughout school and was lucky enough to graduate without debt between scholarships and paying for a couple of semesters out of pocket. I was able to save a bit throughout school, but ultimately was not that careful with my spending (I recently realized this after starting to read MMM). Having recently more than doubled my income, I'm trying to not only make sure I don't inflate my lifestyle too much, but also reduce a lot of extraneous spending that was happening during school (ie. eating out too much while being a full time student and working almost full time). After spending a couple months getting my ducks in a row, I'm looking ahead to this next year to find the best allocation of all of my newfound income. The plan for the rest of the year is just funnel as much into tax advantaged accounts as possible

Current numbers
I keep 3-4k in checking account
5k e-fund in a money market fund
2k: brokerage
2k: HSA (will be able to max out from next paycheck)
10k: Roth IRA (from direct contributions and rollovers from college jobs)
2.5k: 403b (4% employer match)
1.5k: 401a (6% direct employer contribution)

For the rest of this year, I'm going to open a traditional IRA to put anything extra into while ramping my 403b contributions. Getting my 403b contributions at the right percent is tricky because my income varies each pay period.

Next year is where it gets more interesting.
I expect to make between ~65 and 75k after shift differentials which are impossible to predict more than 2 months in advance
I expect to spend ~20k, leaving 45-55k for savings and taxes
I will have $57,150 of tax advantaged space:
$23000 403b
$23000 457b
$7000 IRA
$4150 HSA

I obviously have more room in my tax advantaged accounts than money to put into them, however I know the traditional advice is to never touch tax advantaged accounts for a house down payment. In this case, however, it seems like saving money anywhere else is just going to reduce my savings rate by increasing my tax liability. Are there reasonable ways to utilize tax advantaged accounts for house down payments? I know Roth IRAs let you withdraw principal plus 10k, but are there any options for pretax accounts besides 401k loans?

To me, it seems like I'm either going to be "losing the space" in the retirement accounts now by saving somewhere else or later by making a down payment, so I may as well maximize my saving rate right now.

MDM

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Re: Down payment vs tax advantaged account, one or the other or both?
« Reply #1 on: November 08, 2023, 02:59:56 PM »
kneelr, welcome to the forum.

See the Investment Order post for general suggestions. 

To your specific question, "It is up to you whether to consider "saving for a house down payment" as a "day to day expense", vs. lumping the down payment savings in with "taxable investments" at the end."

See also Traditional versus Roth - Bogleheads for that choice.  Whether to go Roth or traditional at a tax rate of 22% or higher is debatable, but most would agree with "If you can contribute to Roth accounts today at [a tax rate of] 12% or less, it is usually a good idea as this is a historically low tax rate - especially if you are far from retirement. "

Laura33

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Re: Down payment vs tax advantaged account, one or the other or both?
« Reply #2 on: November 09, 2023, 09:00:35 AM »
I'm not as familiar as others with those specific types of accounts, so I am going to focus on one bigger-picture suggestion:  think of buying a house as a consumption decision, not an investment decision.  It's not "saving for a house" vs. "saving for retirement."  It's "spending on a nicer/bigger living environment" vs. "saving for retirement."

I'm sure that optimizing your savings among tax-advantaged and non-tax-advantaged accounts will save you some money.  But you know how you save orders of magnitude more?  You don't spend six figures on someplace to live just because it's bigger/nicer. 

Not that you should never buy a house.  But generally with spending decisions, you do best if you (1) wait until you actually need to spend the money, and (2) then buy the minimum version that meets those needs.  You are clearly good at this in other aspects of your life -- witness your current expenses.  But a lot of people get sucked into thinking of owning a home as an "investment," which seems to justify sort of an unthinking "I'll just buy whatever I want and can cover payments on, because it's investment, not consumption."  But in reality, unless you're buying a rental property, you're buying it because you want to enjoy living there.*  So treat it that way. 

tl;dr:  before focusing on the minutia of how to best save a downpayment, figure out where and when the increased costs of owning a home fit into your overall FIRE plans. 


*People also justify it as an asset whose value will grow and point to places like SF, where people can make ridiculous amounts on increased home values.  But IMO, that's speculation, not investment.  You have no basis for knowing whether housing prices in your area are going to shoot through the roof, drop, stay steady, or grow over time -- and the people who are telling you they do know all have a vested interest in getting you to buy.  Plus, you know, you're never going to actually recognize any gains unless you sell, which sort of defeats the purpose of gaining financial stability from having a paid-off home.  You're better off if you treat a house as a consumption item, and then be pleasantly surprised if you ultimately make money on a sale.

dandarc

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Re: Down payment vs tax advantaged account, one or the other or both?
« Reply #3 on: November 09, 2023, 09:29:11 AM »
+1 on "buying a house is an incredibly expensive luxury". Mortgage P&I on our house is under $600 and I'm right now looking at rentals at $2,000 / month for a likely move (well certain move, exact location and timing of said move is still up in the air) and thinking "at that price, I'll rent all day vs. staying in our house and we'll be hard pressed to find a house even close to as cheap as this one". When I start thinking about the hassle factor of owning on top of the financials, $3,000 for rent doesn't seem at all unreasonable to me. And if you can be all-in spending $20K annually, you've got a much cheaper rental situation already than buying a cheap house. So I'd definitely put off buying a house until you're very sure that you definitely want to buy.

Also if you want to play around with tax scenarios, MDM's case-study spreadsheet which you can find on this forum is a very good tool. If you can really spend only $20K per year, many possibilities on Roth vs. Traditional can come into play - marginal tax rates generally get lower as income goes lower, but there comes a point where certain tax credits can come into play. Whatever you do, don't let perfect be the enemy of the good - Roth vs. Traditional is a small potatoes decision vs. "invest vs. blow it on a luxury house". I would prioritize the HSA if you can do this via payroll and there's decent investment choices - one of the few ways you can save on FICA while investing the money, and also when withdrawal time comes, if you have eligible medical expenses (save these receipts immediately!), no tax on withdrawing either.

Dicey

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Re: Down payment vs tax advantaged account, one or the other or both?
« Reply #4 on: November 09, 2023, 11:46:59 AM »
I had a rare cancer with a "propensity to recur" when I was in my very early twenties. I wanted to own a house with all my might. It represented stability and security to me. When Roths were introduced, I ignored them, because I knew I'd need the money for a DP. I put my money in taxable accounts and CDs (which had a decent return back then.  I have no regrets. Now that CDs are actually paying more than nothing, that might be an option for you to consider.

Funny, when I had a different cancer 40 years later, financially it wasn't even a blip on my radar. I'm so grateful to my past self for the decisions I made then.

Point is: house buying/home ownership isnít for everyone. I'd carefully examine the "why" of your desire to buy a home and listen to your gut.
Best wishes to you on your journey, whatever you decide.


kneelr

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Re: Down payment vs tax advantaged account, one or the other or both?
« Reply #5 on: November 09, 2023, 11:49:17 AM »
Hey all.
Thanks for the input, especially with reframing a house purchase as ultimately a luxury expense compared to my current situation of living in a small apartment with a roommate to keep expenses low. I think that I have had house ownership pushed as an ideal because "eventually you won't want to keep living with roommates and will want to start building equity". However I do really appreciate the flexibility that comes from renting right now.

In terms of Roth vs Traditional tax advantaged, I'll have to look into that Bogleheads link and find and play with that spreadsheet. I was basing most of my post of of a Mad Fientist post I read that said for FI purposes, Traditional accounts are best because of their tax advantages now combined with the ability to perform Roth conversions later. https://www.madfientist.com/traditional-ira-vs-roth-ira/. It does seem like ensuring that I make enough traditional contributions to keep myself firmly in the 12% tax bracket is important and then Roth accounts may have more merit than I initially thought.

Unfortunately, I've looked into and I can't get payroll deductions to the HSA, but it does still seem like the best account to max out first even without deductions. I do need to find a good method for saving receipts though.

MDM

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Re: Down payment vs tax advantaged account, one or the other or both?
« Reply #6 on: November 09, 2023, 12:18:10 PM »
Unfortunately, I've looked into and I can't get payroll deductions to the HSA....
That would be unusual if you are using an HSA-eligible High Deductible Health Plan (HDHP) offered by your employer.

Regardless of the provider, are you covered by such an HDHP (and have no other, disqualifying, coverage)?  If not, you aren't eligible to make HSA contributions.

See Publication 969 for details about HSA eligibility.

kneelr

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Re: Down payment vs tax advantaged account, one or the other or both?
« Reply #7 on: November 09, 2023, 12:36:36 PM »
MDM, yes I am covered by an HDHP, however I am still lucky enough to be under 26 and covered under my parents HDHP for very minimal extra (even less premium than I would pay for my employer's plan).

Dicey, thanks for you input. It seems like you have a lot of perspective on the dilemma of the right amount to focus on FI and/or RE in your 20s.

MDM

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Re: Down payment vs tax advantaged account, one or the other or both?
« Reply #8 on: November 09, 2023, 12:50:20 PM »
MDM, yes I am covered by an HDHP, however I am still lucky enough to be under 26 and covered under my parents HDHP for very minimal extra (even less premium than I would pay for my employer's plan).
That's great - take advantage!

Given that you are aware of this feature, you probably also know that you may contribute the family maximum to your own HSA, regardless of what your parents do with their HSAs.

kneelr

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Re: Down payment vs tax advantaged account, one or the other or both?
« Reply #9 on: November 09, 2023, 01:09:23 PM »
Wow. I was not aware of that. I'll have to look into it more. Thanks!

 

Wow, a phone plan for fifteen bucks!