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Logic: If I withdraw from Roth IRA to buy the house, I lose the future tax free growth potential for the withdrawn money forever.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?