Thank you guys for the comments. I definitely need to look into an IRA thank you for that advice. I don't believe my employer offers an IRA just our 401k so any advice on the best place to start one? I am comfortable with Vanguard would that be a good place?
One of the great things about IRAs is the very fact that they
aren't tied to an employer (which means you get to choose the broker and the investments, rather than being stuck with whatever the idiots at your employer -- who probably know less about investing than you will by the time you finish talking to us -- pick). Yes, Vanguard would be an excellent choice (that's where my IRAs are).
That last statement was plural, by the way, because IRAs are individual accounts and not shared between spouses. In my case, there are a total of 3 accounts: my traditional, my wife's traditional, and my wife's Roth. The Federal annual contribution limit (currently $5,500) is per-person, so if you're married you can contribute up to $11,000 total. Make sure that if you're married, you max out that spousal IRA too.
As for the timeframe of the purchase the 5 years is just an estimate I am constantly checking the market and have about 10% saved in my credit union but I am working to build to 20% down so wouldn't it be better to take the tax hit in an index fund gaining 5-6% a year versus sitting in a credit union earning less than 1%?
Paying taxes on long-term capital gains (in a taxable account) is perfectly fine. Even foregoing tax-advantaged growth by withdrawing from a retirement account (as I mentioned before) is acceptable, although not ideal. What you really want to avoid is getting hit with the 10% (or 20% in the case of withdrawing from an HSA)
penalty for failing to correctly abide by the withdrawal rules.
However, taxes are the issue when deciding between
account types (e.g. a tax-advantaged account vs. a taxable account), which is a mostly* separate and orthogonal issue from deciding between
investments (e.g. an index fund vs. a money-market fund). In other words, you can choose any combination: an index fund in an IRA, an index fund in a taxable account, a money-market fund in an IRA, or a money market fund in a taxable account.
The real issue when choosing between investments is volatility: instead of growing 5-6% a year, your stock index fund might
lose 6% a year (or more!) instead. But as long as you're
sure that you're okay with the idea that
in a strong bear market you might have to delay your purchase, putting your down-payment money in a stock index fund is fine.
(*Sometimes investment choices can have tax implications; read
Principles of Tax-Efficient Fund Placement for the details. Also read
the rest of that wiki.)