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Saving for Down Payment: 401k or CASH

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Money Talk > Personal Finance

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saxman8000
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Saving for Down Payment: 401k or CASH  Reply with quote  

I am saving aggressively for a down payment on a home. Is it better to put the money into my 401k and borrow from it, or is it better to put the month into non-retirement investments?
Post Sat Apr 15, 2006 1:41 am
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Avino
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If you put the money into your 401k and then borrow from it, your going to have to pay it back, as well as whatever the mortgage on your new home will be, thus higher overall payments in the short term.

If you have faith in your 401k investments, you could open up a brokerage account online and invest your money into similar funds or stocks as your 401k, then take the money out when your ready, but I guess the next question would be what is your time horizon? 1 yr, 5 yrs, etc. because as I have learned just from reading the posts on here, stocks and such are good investments over time, but more of a gamble in the very short term.

If it was me in your situation, I would put the money somewhere I can have instant access to it when I need it, and not have to pay it back. As to where exactly to put it, well others here have way more expertise on that than I do.

~A.

Also blogging @ avinos2cents.blogspot.com
Post Sat Apr 15, 2006 2:12 am
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Stock Mama
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If it were me, I'd keep it as cash, either in a savings account or a money market account. Your 401(k) is an investment account, not a savings account, and your ability to withdraw money is different than it is with savings.
Post Sat Apr 15, 2006 4:25 am
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efflandt
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If you put the money in your 401k and borrow it back, even though you are paying the interest to yourself, the borrowed money and interest could be taxed twice. It is paid back with after-tax money, and your distribution will be subject to your future (unknown) tax rate when withdrawn. There is no tax deduction for 401k loan interest, regardless of purpose.

I believe you have to pay off a 401k loan within 5 yrs (on top of your new mortgage and property tax). If you leave that employer (by choice or not), the 401k would become immediately due and payable, and could be subject to tax and penalty if not paid quickly.

A Roth IRA would be better. You could still qualify, even with a 401k, as long as income is not too high. Contributions are after tax money. But without penalty, contributions can be withdrawn at any time, and up to $10,000 of unqualified gains can be used for 1st home purchase. http://www.irs.gov/ publication 590 expains Roth IRA and form 8606 and instructions explain distributions.

In a taxable account, your tax margin could eat up possibly 25% or more of earnings. But in a Roth IRA, up to $10,000 of gains would not be subject to tax if used towards 1st home purchase. So if you are qualified for a Roth IRA and not already contributing the maximum, that would be your best option.

Note that a Roth IRA is a type of account, not a specific investment. It could be at a discount broker with investments from money market fund or CD to riskier bonds, mutual funds, or stocks.
Post Sat Apr 15, 2006 2:59 pm
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Kiaser
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Looks like you are trying to save up quickly, hence "aggressively, so I doubt you know exactly when you'll be able to buy a house other than as soon as possible. Since that is your situation you gotta stick the money where it can be accessible on a moments notice WITHOUT penalty and large taxes. Also, since it probably won't be a long term investment (because you will be pulling from it for a downpayment), you're not gonna get tremendous returns in the short term unless you make risky investments (which I wouldn't recommend for your money as a whole). Keep in mind fee's and commissions could hurt your money as well.

Looks for some nice no-load, tax-exempt/tax-managed money market accounts. Something along the line of indexes, bonds, and CDs can be beneficial and safer in the short term.

My vote is for money market
Post Sat Apr 15, 2006 4:45 pm
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