Author Topic: Mode of saving for house?  (Read 4912 times)

mbk

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Mode of saving for house?
« on: July 06, 2013, 11:00:53 AM »
I want to buy a house in 4-5 years and will start saving for that purpose next year.
I can save an extra  $1k-1.5k/month from next year onwards by a combination of reduction in fixed expenses (mainly rent) and getting free of CC debt payments. And I expect my savings potential to further increase once I stop maxing health FSA contributions in 2015 and a raise in salary by that time.
My dilemma is where to park this money.
Option 1) After tax earnings in savings account with < 1% APR.
Option 2) After tax earnings in Roth IRA.
Option 3) Before tax earnings in 403b and 457b.
For the calculations, I am in the 15% marginal tax bracket (married single income). And I contribute $1k/month to my retirement accounts (401a, 403b and 457b).

After evaluating the options, I came up with this plan.
The Plan: Put $10k/year in Roth IRA (mine+spousal) and the remaining amount in 403b or 457b. When the opportunity to buy a house comes, take a loan from my 403b. After buying the house redirect the savings  to pay off the 403b loan.
Logic: If I withdraw from Roth IRA to buy the house, I lose the future tax free growth potential for the withdrawn money forever. With the 403b loan, I lose the ability to contribute to Roth when I'll be clearing the loan. But my marginal tax bracket may be higher during that time (with a high probability).   In case I lose/switch jobs, the roth IRA (and 457b) money acts as a backup money to pay off the 403b loan within 60 days.
For option 3, I have access to 17% more money, but there is limited protection in case I lose a job.
With option 1, I can put money in Roth IRA/403b after I buy the house, but the growth potential is lost till I buy the house. Due to compounding effect, in the long term this is worse with greater probability.

Dear Mustachians, am I missing something in my calculations?
« Last Edit: July 06, 2013, 11:35:54 AM by mbk »

markstache

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Re: Mode of saving for house?
« Reply #1 on: July 06, 2013, 11:59:40 AM »
I think you are being too clever with this. Keep it simple. Pick the level of risk you are willing to accept with this money (savings account/CD, bonds, stocks, in the usual order of risk and reward) and just use post-tax dollars in a standard bank or brokerage account.

Zamboni

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Re: Mode of saving for house?
« Reply #2 on: July 06, 2013, 12:58:55 PM »
+1 to markstache

You need to be sure about tax implications.  I used money from my 457b plan as part of the down payment on my current house, and I ended up losing a big chunk to taxes.  Also, please bear in mind that there is some time/hassle/procedure involved in getting the money out of retirement accounts.  If you decide to go that way, you need to plan for at least a month delay in getting that money.  Your mortgage company is going to want to see that money in a liquid account well before closing.  With a 4-5 year timeframe and steady investment over time, probably just going with CD's or a Vanguard account is the way I would go if I were in your shoes.

ender

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Re: Mode of saving for house?
« Reply #3 on: July 07, 2013, 06:36:11 AM »
Are you maxing FSA or HSA health contributions?

If FSA, make sure you realize that money is lost if you don't use it in a year.

An HSA allows you to keep money year to year.

mbk

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Re: Mode of saving for house?
« Reply #4 on: July 08, 2013, 01:06:39 PM »
Are you maxing FSA or HSA health contributions?

If FSA, make sure you realize that money is lost if you don't use it in a year.

An HSA allows you to keep money year to year.

FSA for lasik. I don't qualify for HSA.

mbk

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Re: Mode of saving for house?
« Reply #5 on: July 08, 2013, 01:09:56 PM »
I think you are being too clever with this. Keep it simple. Pick the level of risk you are willing to accept with this money (savings account/CD, bonds, stocks, in the usual order of risk and reward) and just use post-tax dollars in a standard bank or brokerage account.

I was doing a thought exercise. Of course, the reality will be different most of the times.

mbk

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Re: Mode of saving for house?
« Reply #6 on: July 08, 2013, 01:12:29 PM »
You need to be sure about tax implications.  I used money from my 457b plan as part of the down payment on my current house, and I ended up losing a big chunk to taxes.  Also, please bear in mind that there is some time/hassle/procedure involved in getting the money out of retirement accounts.  If you decide to go that way, you need to plan for at least a month delay in getting that money.  Your mortgage company is going to want to see that money in a liquid account well before closing.  With a 4-5 year timeframe and steady investment over time, probably just going with CD's or a Vanguard account is the way I would go if I were in your shoes.

Thanks for sharing your experience. Good point regarding the time delay. I haven't considered that.


willn

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Re: Mode of saving for house?
« Reply #7 on: July 08, 2013, 03:30:45 PM »
I agree, no retirement accounts should be used. Since the money will be post tax anyway, avoid the hassle of these. Plus if you need the cash for an emergency or opportunity before then it is available more easily.  For savings you'll need in 5 years or longer, I say mutual funds that match your risk comfort level. I also believe having 3-6 months cash emergency fund in savings + whatever you need for your down payment. Owning a house without a cushion of money invites water heater and furnace breakdowns, right after the roof springs a leak.

fiskeb

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Re: Mode of saving for house?
« Reply #8 on: July 08, 2013, 06:15:03 PM »
I'm also saving for a house and want to do it with cash/no mortgage.  Pouring everything I can into aggressive mutual funds with good long track records and will buy when the money is there and the market is up, whenever that may be.  4-5 years would be great, but I am maybe more flexible on the time frame.

But I'm crazy.  It takes nerves of steal to watch your house fund take a huge market dip and get excited about buying more.

neoptolemus412

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Re: Mode of saving for house?
« Reply #9 on: July 23, 2013, 09:12:58 AM »
This is a house fund.  Thus, don't worry about returns b/c cash is the most valuable tool in your arsenal.  An all cash offer > 20% down w/ mortgage > any other type of financing.  So you want to ensure this money is safe as possible.  Here are 3 types of places to put it that will give you this. 

1) Money Market Account
2) Savings Account
3) CD (if you know exactly when you'll start looking & time it appropriately)

All 3 offer low returns.  Each has some interest, but are minimal in today's interest rate environment.  However, all are almost risk free as long as you go to a company with a long track record. 

Yes, you won't make any money against inflation, but you won't lose money on market swings & interest rate changes.   You said if you lose your job.  This means you're overly leveraged in one area for cash flow.  Or put it another way, you lose your job, then you can't buy a house.  Thus, it's imperative to keep this money somewhere safe b/c you can't afford for it to decrease.  Just keep piling up cash.  The key to real estate is making your money on the purchase, not the sale.