Author Topic: How To Invest Roth IRA for House Downpmt (5yr)  (Read 4165 times)

rj_musser

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How To Invest Roth IRA for House Downpmt (5yr)
« on: January 03, 2015, 04:48:47 PM »
    Hey guys!

    I am 23, recently married, and working as a financial analyst. My wife and I are looking to buy a house in about 4-5 year time-frame. We currently have a roth IRA with $5,500 in it (first year funding) and would like to use it primarily for down payment on our house for the above timeframe.

    I have chosen the funds that I believe are best for a longer time-horizon and I am less risk-averse than most. I am planning to invest this week, but am a little nervous that I am making a bad decision by being so aggressive over such a short time horizon. What is everyone's thoughts on how I should play this (stocks vs. bonds, etfs, etc)

    Below is the current portfolio I am thinking about:
    -Dividend Aristocrats ETF
    -International Dividend ETF
    -US Large-Cap Growth ETF
    -SmallCap Healthcare ETF
    -IEP Icahn Enterprises Stock
    -Wells Fargo stock
    -Gilead Sciences stock
    -about 20% in bonds

    This looks good for long-term to me, but given the shorter time horizon should I be almost all focused on bonds and capital preservation?



27y/oTennesseeRetiree

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Re: How To Invest Roth IRA for House Downpmt (5yr)
« Reply #1 on: January 03, 2015, 10:05:12 PM »
How are you planning to take the money out for your down payment without penalty?

My understanding is that you can take out contributions, but anything else will have taxes and a penalty. It may make more sense to invest your down payment money separately from your Roth. Both allow for growth of after tax dollars, but one lets you use the growth towards your down payment as well.

I believe the mustachian question would be... why not double your savings and do both?

rj_musser

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Re: How To Invest Roth IRA for House Downpmt (5yr)
« Reply #2 on: January 03, 2015, 10:15:14 PM »
You can withdraw from a Roth if you are using the money as a first time homebuyer and are using it for a down payment on a house. As long as your $ has been there over 5 years, you can withdraw it penalty free.

OracleOfAtown

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Re: How To Invest Roth IRA for House Downpmt (5yr)
« Reply #3 on: January 03, 2015, 11:09:47 PM »
You can actually withdraw your contributions to you Roth Ira anytime tax and penalty free.  So i would recommend trying to fully fund it ($11,000) a year.  In 5 years you'd have $60,500 available for withdrawal for your down and the earnings can stay in for the future.  Who knows maybe in 5 years you'll have a higher income or even enough other funds saved so you dont have to tap your Roth IRA. That would be the best case scenario because ROTH funds withdrawn when you retire will be tax free. As far as allocation it seems like you enjoy and want to pick funds on your own. It looks well diversified. I personally would just dump funds into Vanguard index funds.  I usually go S&P 500, Mid Cap and Small Cap.  60%, 20%, 20%. 

27y/oTennesseeRetiree

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Re: How To Invest Roth IRA for House Downpmt (5yr)
« Reply #4 on: January 04, 2015, 01:02:05 AM »
I didn't realize there was a first time home buyer exemption. That is a nice loophole for folks who don't own homes yet!

surfhb

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Re: How To Invest Roth IRA for House Downpmt (5yr)
« Reply #5 on: January 04, 2015, 01:22:04 AM »
You don't want to be investing money for house down payment if your timeframe Is 5 years.    What a shame it would be if the market took a 20-50% Downturn at this time.   

Fund your ROTHs and put the down payment money in a savings account that is safe.    Think about it..... That money is already working for you if it's going to be used to purchase a primary residence.   That's how I look at it anyway

That money is your home..... Don't risk it
« Last Edit: January 04, 2015, 01:24:33 AM by surfhb »

Frankies Girl

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Re: How To Invest Roth IRA for House Downpmt (5yr)
« Reply #6 on: January 04, 2015, 01:44:16 AM »
You don't want to be investing money for house down payment if your timeframe Is 5 years.    What a shame it would be if the market took a 20-50% Downturn at this time.   

Fund your ROTHs and put the down payment money in a savings account that is safe.    Think about it..... That money is already working for you if it's going to be used to purchase a primary residence.   That's how I look at it anyway

That money is your home..... Don't risk it

+1

5 years is too short a time horizon to take risks with money you have to have. While the market does go up over the long term, short term volatility could hit at just the wrong time.

chuckaluck

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Re: How To Invest Roth IRA for House Downpmt (5yr)
« Reply #7 on: January 04, 2015, 02:11:55 AM »
I couldn't agree more with Surfhb and Frankies Girl.  Stocks are currently high, interest rates are currently low. Forget about bonds. For a house in 4 to 5 years, I would be much more conservative with my potential down payment.  A high yield, online savings account would be my vote for a known amount of cash I would need in 4 or so years.

JoshFire

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Re: How To Invest Roth IRA for House Downpmt (5yr)
« Reply #8 on: January 04, 2015, 04:58:26 AM »
I couldn't agree more with Surfhb and Frankies Girl.  Stocks are currently high, interest rates are currently low. Forget about bonds. For a house in 4 to 5 years, I would be much more conservative with my potential down payment.  A high yield, online savings account would be my vote for a known amount of cash I would need in 4 or so years.

Curious as to why you would say to forget about bonds. I am thinking of doing something similar to save for a home expansion ($50k). My 401k is 100% equities, so throwing money into a Roth with 100% VBTLX seems like a good way to adjust my asset allocation and save for this expense at the same time.

chuckaluck

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Re: How To Invest Roth IRA for House Downpmt (5yr)
« Reply #9 on: January 04, 2015, 05:43:53 AM »
I couldn't agree more with Surfhb and Frankies Girl.  Stocks are currently high, interest rates are currently low. Forget about bonds. For a house in 4 to 5 years, I would be much more conservative with my potential down payment.  A high yield, online savings account would be my vote for a known amount of cash I would need in 4 or so years.

Curious as to why you would say to forget about bonds. I am thinking of doing something similar to save for a home expansion ($50k). My 401k is 100% equities, so throwing money into a Roth with 100% VBTLX seems like a good way to adjust my asset allocation and save for this expense at the same time.

Everyone has a different situation.  RJ is 23 years old, trying to save up enough for a DP for his first house. An enviable and worthwhile goal.  I based my opinion on his statement that he has just 5500 in a Roth (with no mention of other retirement or non-retirement funds).  You are older, apparently have a home, and a 401 K, perhaps taxable accounts as well, and so I'll therefore assume more financially established.  You have at least a few good options that RJ does not have for your expansion --- You could take out a HELOC or refinance, for example. Or perhaps suspend or borrow from your 401K (not advisable). But my issue here is that having multiple buckets from which to draw funds provides flexibility and reduces risk at any moment in time.  RJ is not likely at that point yet.  Also, it is not only my concern of what will happen 4 or 5 years from now (in this case).  By this I mean, a great house deal may come up within the 4 to 5 year time frame.  Having a potential source of funds that is not caught in or recovering from a devaluation would seem prudent to allow RJ to "jump" on the deal.     

JoshFire

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Re: How To Invest Roth IRA for House Downpmt (5yr)
« Reply #10 on: January 04, 2015, 06:28:03 AM »
I couldn't agree more with Surfhb and Frankies Girl.  Stocks are currently high, interest rates are currently low. Forget about bonds. For a house in 4 to 5 years, I would be much more conservative with my potential down payment.  A high yield, online savings account would be my vote for a known amount of cash I would need in 4 or so years.

Curious as to why you would say to forget about bonds. I am thinking of doing something similar to save for a home expansion ($50k). My 401k is 100% equities, so throwing money into a Roth with 100% VBTLX seems like a good way to adjust my asset allocation and save for this expense at the same time.

Everyone has a different situation.  RJ is 23 years old, trying to save up enough for a DP for his first house. An enviable and worthwhile goal.  I based my opinion on his statement that he has just 5500 in a Roth (with no mention of other retirement or non-retirement funds).  You are older, apparently have a home, and a 401 K, perhaps taxable accounts as well, and so I'll therefore assume more financially established.  You have at least a few good options that RJ does not have for your expansion --- You could take out a HELOC or refinance, for example. Or perhaps suspend or borrow from your 401K (not advisable). But my issue here is that having multiple buckets from which to draw funds provides flexibility and reduces risk at any moment in time.  RJ is not likely at that point yet.  Also, it is not only my concern of what will happen 4 or 5 years from now (in this case).  By this I mean, a great house deal may come up within the 4 to 5 year time frame.  Having a potential source of funds that is not caught in or recovering from a devaluation would seem prudent to allow RJ to "jump" on the deal.   

Got it - I was more wondering if you were prognosticating about bond funds. I assumed since you said interest rates were low that you expected them to rise. I agree with you that RJ probably has less options, and might be forced to wait out the market (delay his home purchase) if he invests the money.

2Birds1Stone

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Re: How To Invest Roth IRA for House Downpmt (5yr)
« Reply #11 on: January 04, 2015, 09:51:26 AM »
YIKES!

I would highly recommend never touching the $$ in your Roth IRA unless it was an absolute emergency, or you were withdrawing during actual FIRE.

A Roth is a gift in the sense that you have a very limited amount you can contribute, it grows tax free, with compounding its a VERY good investment vehicle for a long term strategy.

Pulling any money out prior to when you REALLY need it during an emergency means you can't put it back in. So in essence, you are shafting your future self.

KBecks2

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Re: How To Invest Roth IRA for House Downpmt (5yr)
« Reply #12 on: January 04, 2015, 10:19:49 AM »
OK, I think you rock.  Do you have an emergency fund set aside?  If not, then you get that sucker set up before we even talk about investing.  Get your effing emergency fund saved.  It's  3-6 months of your current expenses.  You keep that in a money market account and don't mess with it.

Then, you save 15% of your income for retirement.  This can be in your employers 401k unless it sucks.  Then it goes in your Roth.

Then, you save for your house.  Now, why are you getting all fancy and putting your home down payment in a ROTH?  Save that for retirement.  Keep it in your ROTH and let that money grow, baby, grow for the next 30-40-50+ years.

Get a savings account / brokerage account.  If you have no time, S&P 500 index, it is all you need.  No bonds at your age. 

Investing is for your mad money, it is not really for your house money.  The guideline is to invest if you don't need it for at least 3 - 5 years.  You may be dancing close to that timeline.  Don't be afraid to hold some cash!

If you want to invest in individual stocks, keep saving until you have about $10,000 for your stock portfolio and in the meantime, start to read.  I invest in individual stocks under the advice of a paid newsletter (Motley Fool Pro).  If you are going to go it alone, you have to do your homework, study each company's earnings, listen to / read transcripts of every conference call.  Do not have a portfolio of more than 10 stocks by yourself, you will not be able to keep track of it all.  Maybe you want to start with 5 stocks.  Really know your companies.

I listen to a lot of Dave Ramsey and Jim Cramer podcasts and I subscribe to the Motley Fool Pro, Stock Advisor and Rule Breakers services.  They are all very good sources and give different perspectives on saving and money management.

Have fun and live below your means.  You will do great!

Disclosure:  I own shares of GILD and WFC.

My short answer is to keep that $5,500 for retirement - probably in S&P 500 or maybe $1k into a couple stocks if you want to start learning,  and save like crazy this year in a regular account for your house. 
« Last Edit: January 04, 2015, 10:28:26 AM by KBecks2 »

Mr. Captain Cash

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Re: How To Invest Roth IRA for House Downpmt (5yr)
« Reply #13 on: January 04, 2015, 03:02:45 PM »
With just starting out investing I would stick to a couple funds like Vanguards Total Stock Market Index and Vanguard FTSE Developed ex North America Index ETF. The portfolio you have recommended is rather complex for starting out.  If you are planning on maintaining target percentages of each asset class let's say

Below is the current portfolio I am thinking about:
-Dividend Aristocrats ETF 10%
-International Dividend ETF 10%
-US Large-Cap Growth ETF 20%
-SmallCap Healthcare ETF 10%
-IEP Icahn Enterprises Stock 10%
-Wells Fargo stock 10%
-Gilead Sciences stock 10%
-about 20% in bonds
 
It is possible that the added benefits from increased diversity will be diminished from the increase in management fees and expenses accumulated from stock purchases or sales. If you are dead set on buying a house within the next five years I would keep your money in a high interest savings account. I myself invested my money in the markets with the mindset that I would be completely flexible with my house target date purchase. If the markets were to crash when I planned on buying my house it meant I keep investing and delay buying a house until the markets recover.

Lots of options out there have to determine which one is right for you.

Mr. Captain Cash