First Time "Future" Buyers in Irvine Here - Confused... 20% Down or 15% 401K Contribution?

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CTNative_IHB

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I have an option...



I can lower my wife's 10% 401K contributions to her company's matching at 3%, and lower mine from 15% to 3% and bankroll that additional after-tax income in an MMA to try and get over the down payment minimums to avoid PMI. In addition to what we already have saved, I might make it within a year or two. The alternative, is to keep those 401k contributions where they are but only come up with 10% or so of the down payment.



On the one hand, I'll get a lower interest rate and no PMI. On the other, I am paying taxes on the money I'm saving in order to produce that down payment and getting next to nothing for them in the MMA.



Any advice would be helpful.



-CTNATIVE
 
[quote author="CTNative" date=1215507619]I have an option...



I can lower my wife's 10% 401K contributions to her company's matching at 3%, and lower mine from 15% to 3% and bankroll that additional after-tax income in an MMA to try and get over the down payment minimums to avoid PMI. In addition to what we already have saved, I might make it within a year or two. The alternative, is to keep those 401k contributions where they are but only come up with 10% or so of the down payment.



On the one hand, I'll get a lower interest rate and no PMI. On the other, I am paying taxes on the money I'm saving in order to produce that down payment and getting next to nothing for them in the MMA.



Any advice would be helpful.



-CTNATIVE</blockquote>


Does your 401k plan provide for loans for the purpose of home buying? Another option, not necessarily one I advocate, would be to keep the contributions up and then borrow against the 401k to shore up the DP and avoid PMI when you buy...
 
other important factors would be your age, income, etc. Like for example, if your under the limit to be able to contribute to a Roth....
 
Borrowing against the 401K is an option, but I always thought it was not a good one. I've read so much advice against ever touching your 401k for any reason that I've just shelved the concept since nobody ever seems to advocate it. If anyone considers it viable, I'd be more than interested in their ideas about it.



We are both in our early 30's, and our gross annual household income last year was $198K, but due to this economy I am expecting that to drop to somewhere around $190,000 due to declines in bonus programs, profit sharing, etc... We were just married two years ago, have no debt (small car payment), no dependents, rent, and have been following the bubble for almost four years now. Of course, my wife is itching to get a house, but she understands what's happening. Because we're in our 30's we'd like to skip the starter home condo stage and go right to something we'd like to live our 30's and 40's and maybe 50's through; especially since I assume anything we buy in the next 2-3 years may continue to depreciate and bounce around along the bottom for several years beyond that - so we'd rather not ride that out in a condo; but ride the whole down cycle out in something we're happy with. We have been saving cash but again - what is the opportunity cost of a large cash down payment for a lower interest rate and no PMI versus compound interest on 401k allocations over the same time period. Not sure.
 
[quote author="CTNative" date=1215511472]Borrowing against the 401K is an option, but I always thought it was not a good one. I've read so much advice against ever touching your 401k for any reason that I've just shelved the concept since nobody ever seems to advocate it. If anyone considers it viable, I'd be more than interested in their ideas about it.



We are both in our early 30's, and our gross annual household income last year was $198K, but due to this economy I am expecting that to drop to somewhere around $190,000 due to declines in bonus programs, profit sharing, etc... We were just married two years ago, have no debt (small car payment), no dependents, rent, and have been following the bubble for almost four years now. Of course, my wife is itching to get a house, but she understands what's happening. Because we're in our 30's we'd like to skip the starter home condo stage and go right to something we'd like to live our 30's and 40's and maybe 50's through; especially since I assume anything we buy in the next 2-3 years may continue to depreciate and bounce around along the bottom for several years beyond that - so we'd rather not ride that out in a condo; but ride the whole down cycle out in something we're happy with. We have been saving cash but again - what is the opportunity cost of a large cash down payment for a lower interest rate and no PMI versus compound interest on 401k allocations over the same time period. Not sure.</blockquote>
Look into BofA's No Fee Mortgage loan, although the rate is a bit higher they do pay for most all of your closing costs as well as the PMI for all loans up to 90% LTV.
 
In general, borrowing agaist your 401k is not a great idea. Most plans require you to pay back the loan immediately when you leave the company, which can cause great financial stress if you are laid off.



If I were you, I will cut down 401K contribution (but at least enough to get the company contribution) and start saving towards down-payment and emergency cash ( if you don't already have one). 401K money is not as liquid as cash and other after tax investments. Any asset portfolio need to be "balanced". In your situation, "balanced" means not only have a balanced stock / MF portfolio in 401K, but also a balanced portfolio among before tax saving ( i.e. emergency cash), after tax saving ( 401K), and equity towards your residence.
 
Contribute to your 401k on a minimal basis, its good that your company matches. But focus on building that down. Use it to your primary residence if you don't want PMI; if you can, use as little of your own money as possible; leverage as much as you can, with ample cash reserves. I've been in the equities markets for almost 10 years now, before the tech bubble; granted, it has gotten me to where I am, but it's not a plan for true retirement. Ask anyone, your parents, friends of your parents who are about to retire. They have gotten to where they are today not with their 401, stocks, investments or savings. They got to where they are with their house, equity and appreciation. I can almost guarantee you that the majority of baby boomers wealth came from their housing portfolios, well maybe except for some with small or mid-size businesses.



A good safe plan, instead of MMA maybe to invest in A-Share mutual funds; upfront costs but you should have some appreciation in a couple of years. I would probably put down 20% on my primary residence since it doesn't generate cash flow, but on investment, rental properties, no more than 10%. You sound like you should be able to come up with 20% in a couple of years if you and your wife really decide to live simply and focus your financial goals together. Good Luck, your future Irvine neighbor r/c...
 
[quote author="irvine123" date=1215520326]In general, borrowing agaist your 401k is not a great idea. Most plans require you to pay back the loan immediately when you leave the company, which can cause great financial stress if you are laid off.



If I were you, I will cut down 401K contribution (but at least enough to get the company contribution) and start saving towards down-payment and emergency cash ( if you don't already have one). 401K money is not as liquid as cash and other after tax investments. Any asset portfolio need to be "balanced". In your situation, "balanced" means not only have a balanced stock / MF portfolio in 401K, but also a balanced portfolio among before tax saving ( i.e. emergency cash), after tax saving ( 401K), and equity towards your residence.</blockquote>


123 is right, playing with your 401k can be quite dangerous. Pretty much every 401 will require payback in the event of termination, which could be problematic if you were at a point where an equity loan against your home was not available.



The upside is you get to defer taxation on that income until much later in life when your tax bracket would be considerably lower and you could avoid paying an additional expense such as PMI. Personally, in the housing purchase situation, I would only borrow a small amount from my 401k if it put me over the hump with regards to getting a much better loan or avoiding PMI. 401k loans typically have a 10-year repayment period and the interest you are paying yourself is usually at a high rate. If it came down to a choice of paying $200 a month of P+I to myself via 401k loan vs. paying $200 of PMI to an insurer, I would go with the former...



I took $50K out of my 401k last summer as the equity markets started their descent and parked it in cash. I have been very happy with that move as I have made money while stocks have crashed... 401k loans can work if used strategically, for the right purpose, and with good care.
 
IPOPLAYA, I am just curious why do you have to take a loan out of the 401k in order to park in cash? Can you just keep it in cash inside the 401K? I sold down my 401k portfolio to 50% cash last year and parked in money market inside my 401K plan. However, I am taking a beating on the other 50%.
 
You two are probably in a not so nice tax bracket so I would think about keeping the 401K contribution at least $10,500 more than you had intended, earmarking this to withdraw for your DP. You get to defer the tax on it this year and next and can withdraw that amount towards a first home purchase without penalty. If you buy a house in 2010, you wouldn't pay the penalty, just the tax, but a lot of that tax will be offset by all the new deductions you get wtih the home purchase and interest.



Remember, PMI isn't for life... only until the LTV ratio is above 80:20. If you put 10% or 15% down, you can pay extra towards your principal to get there faster. Also, PMI is now deductible, so it's quite subsidized. Although I'm not sure if that's perrmanent or if you are above the income where it starts to phase out.
 
Does anyone know if there is a penalty for tapping into your Roth IRA? I've read on Google that you can take out up to 10K for your first house. I'm assuming this 10K is any earnings you've made. Can you take out everything you've contributed since you've already paid taxes on the contribution penalty free?



Right now I'm doing a 4% company match for 401K (don't want to touch) and maxing out my Roth (I'm 28) but my short term goal is to buy my first home soon (1 to 2 years) and I'm wondering if I should stop my Roth for a while to help save for a down payment...
 
[quote author="ScubaSteve" date=1215555480]Does anyone know if there is a penalty for tapping into your Roth IRA? I've read on Google that you can take out up to 10K for your first house. I'm assuming this 10K is any earnings you've made. Can you take out everything you've contributed since you've already paid taxes on the contribution penalty free?



Right now I'm doing a 4% company match for 401K (don't want to touch) and maxing out my Roth (I'm 28) but my short term goal is to buy my first home soon (1 to 2 years) and I'm wondering if I should stop my Roth for a while to help save for a down payment...</blockquote>


You can take the principal out of a Roth at any time for any reason. The earnings can only be withdrawn without penalty for specific things like first home purchase or college education and there are limits for these purposes. However, it needs to be in there for 5 years before you can withdraw earnings penalty free. The investment company will send you a 1099 something or other when you withdraw principal and there is a place on your tax return to indicate that it was qualified because it was contributions only.



I had some of our DP in Roths... left all the earnings in there.
 
[quote author="ScubaSteve" date=1215555480]Does anyone know if there is a penalty for tapping into your Roth IRA? I've read on Google that you can take out up to 10K for your first house. I'm assuming this 10K is any earnings you've made. Can you take out everything you've contributed since you've already paid taxes on the contribution penalty free?



Right now I'm doing a 4% company match for 401K (don't want to touch) and maxing out my Roth (I'm 28) but my short term goal is to buy my first home soon (1 to 2 years) and I'm wondering if I should stop my Roth for a while to help save for a down payment...</blockquote>


how long have you had the Roth IRA? I believe it has to be open at least 5 years to take out the 10k for the house. But like the person said above, principal is always available.
 
[quote author="irvine123" date=1215549276]IPOPLAYA, I am just curious why do you have to take a loan out of the 401k in order to park in cash? Can you just keep it in cash inside the 401K? I sold down my 401k portfolio to 50% cash last year and parked in money market inside my 401K plan. However, I am taking a beating on the other 50%.</blockquote>


At the time, I didn't have a money market type option in the plan. I added a prime fund to our 401k investment options in the Fall but have been too lazy to send the cash back. It's going back this week though. I rebalanced everything to the prime fund at the end of last year and have been exceptionally happy with the result of late.
 
[quote author="stepping_up" date=1215557776][quote author="ScubaSteve" date=1215555480]Does anyone know if there is a penalty for tapping into your Roth IRA? I've read on Google that you can take out up to 10K for your first house. I'm assuming this 10K is any earnings you've made. Can you take out everything you've contributed since you've already paid taxes on the contribution penalty free?



Right now I'm doing a 4% company match for 401K (don't want to touch) and maxing out my Roth (I'm 28) but my short term goal is to buy my first home soon (1 to 2 years) and I'm wondering if I should stop my Roth for a while to help save for a down payment...</blockquote>


You can take the principal out of a Roth at any time for any reason. The earnings can only be withdrawn without penalty for specific things like first home purchase or college education and there are limits for these purposes. However, it needs to be in there for 5 years before you can withdraw earnings penalty free. The investment company will send you a 1099 something or other when you withdraw principal and there is a place on your tax return to indicate that it was qualified because it was contributions only.



I had some of our DP in Roths... left all the earnings in there.</blockquote>


Great this is exactly what I was hoping for! I plan on leaving the earnings in there and am glad to know I can take out all the principal if needed. I've had my Roth since 2003.
 
First, pay off the car loan. I would vote for lowering your contributions right to the employer match....and saving cash. Tell your wife to be patient and have her read the IHB.



I also looked into borrowing from my Deferred Comp account. The interest rate I was going to "pay myself back" was at 10%... I liked the concept, but did not like the fact that I couldn't pre-pay it. The repayment was going to be a set amount automatically deducted from my paycheck, for I think a 3 year period. I always pre-pay off debt, so since I didn't have the option to do so, I ruled it out.



Now considering how crappy the returns would have been (on the mutual funds), the "loan" and paying yourself back 10% interest....sounds like it would have been a good play if done last year. I personally took all of my $$ and banked it in a CD at 5.35%. It is due for a renewal in August....and I think I'm going to keep it there, safe and sound....but at a much lower interest rate.



If I wasn't a reader of the IHB, I would have just left it in funds and lost a whole lot of $$$ (thanks everyone!)



Where in CT? Me: Hebron, Bolton, Chester
 
[quote author="roundcorners" date=1215523018]Contribute to your 401k on a minimal basis, its good that your company matches. But focus on building that down. Use it to your primary residence if you don't want PMI; if you can, use as little of your own money as possible; leverage as much as you can, with ample cash reserves. I've been in the equities markets for almost 10 years now, before the tech bubble; granted, it has gotten me to where I am, but it's not a plan for true retirement. Ask anyone, your parents, friends of your parents who are about to retire. They have gotten to where they are today not with their 401, stocks, investments or savings. They got to where they are with their house, equity and appreciation. I can almost guarantee you that the majority of baby boomers wealth came from their housing portfolios, well maybe except for some with small or mid-size businesses.



A good safe plan, instead of MMA maybe to invest in A-Share mutual funds; upfront costs but you should have some appreciation in a couple of years. I would probably put down 20% on my primary residence since it doesn't generate cash flow, but on investment, rental properties, no more than 10%. You sound like you should be able to come up with 20% in a couple of years if you and your wife really decide to live simply and focus your financial goals together. Good Luck, your future Irvine neighbor r/c...</blockquote>


Since 401ks really began in the early 80s the fact that these plans are a small part of our parent's generation wealth is not surprising. I know plenty of people in their 30s and 40s with hundreds of thousands of dollars in their 401k(s) myself included. If you are a very skilled investor perhaps your money is better spent elsewhere but for the overwhelming majority I think in the long run you are better off investing as much as possible in a 401k.
 
my accountant told me that I can take out up to 10k per person from 401k without penalties for a home purchase.

I have been wondering about this e xact question myself, about putting more in 401k to save taxes or save more on downpayment. i am currently puttint 20% of my income in 401k to reduce my next year's taxes, and i am planning to take out 10k out of my 401k for my home purchase, not planning to borrow. Borrow its okay to me too beacuse the money and interest goes back to your own 401k account.
 
[quote author="ScubaSteve" date=1215555480]Does anyone know if there is a penalty for tapping into your Roth IRA? I've read on Google that you can take out up to 10K for your first house. I'm assuming this 10K is any earnings you've made. Can you take out everything you've contributed since you've already paid taxes on the contribution penalty free?



Right now I'm doing a 4% company match for 401K (don't want to touch) and maxing out my Roth (I'm 28) but my short term goal is to buy my first home soon (1 to 2 years) and I'm wondering if I should stop my Roth for a while to help save for a down payment...</blockquote>
i wondered this question myself and i asked my accountant..she said roth, ira, 401k only 10k max. you can verify this info.
 
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