The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: dragonwalker on May 31, 2020, 11:56:55 PM
-
I'm currently 32 working full time with a 401K that I contribute 10% to. I understand that the typical hierarchy of investment allocation is 401K, then IRA, then taxable brokerage accounts. However if I am looking at purchasing my first home sometime in the next 5-10 years I'm having some trouble understanding whether I should be maxing out my IRA contributions every year when that money could be put towards a down payment at the appropriate time. If I put them into an IRA I could be facing a 10% penalty for early withdrawal. I know there is some amount I can take out penalty free for first home purchase.
Living in southern CA I anticipate I may need a substantial amount on a down payment. 5-10 years is when I anticipate an actual need to purchase a home if I have my own family however I am open to purchasing a home any time from now if an opportunity arises such as a real estate market crash. However my concern being much of my money being tied into taxable brokerage accounts (VSTAX) may also take a hit in value as a real estate markets tank if they ever do to a large degree. However if the real estate tanks severely enough I may still pull money to purchase. With that in mind should I still be maxing IRA contributions?
-
That is up to you, and will depend on the relative value you place on home ownership vs. how soon you would be able to retire comfortably.
-
I married in 2007 and bought a house in 2010. In 2007 I didn't know we would buy a house so soon, so I was putting money into a Roth IRA, and a minimal amount into my 401(k). I was using the rest to pay extra on student loans. The housing crash hit, the government was giving free money towards a house down payment, and we realized it was cheaper to buy a larger house than continue renting. The last part is only partially true as the house we ended up buying added a 45 minute highway commute replacing an 8 minute in town commute.
Roth IRAs allow you to withdrawal contributions tax and penalty free for any purposes. That is what we did. If I had any gains (I'm not sure any remained), I left them in there.
What I don't like about brokerage accounts is if you move your investments around a little it triggers gains even if you don't remove the money from the account. If you move from S&P 500 to bonds, you get taxed, and have to report the sell. If you move from either to a company stock you get taxed and have to report the sell. Whereas I can do as I like in an IRA account without needing to report it.
-
A Roth IRA allows you to hedge your bets. If you need it, the contributions will be available.
-
And note that you can withdraw $10K from your IRA penalty free if you're a first-time home-buyer. If it's from your Roth, you won't pay taxes on that either.
And they're not mutually exclusive. You could contribute to the Roth and to the tax free savings account.