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

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One thing to consider on the 401(k), recent articles have discussed the massive amounts of money vanishing from 401(k) accounts due to the tough financial markets, so a 401(k) loan may not be such a bad idea if you are in your early 30's. My 401(k) plan allows me to borrow up to 40% of my plan's value and pay it back over 15 years at 6.01% (today). I may also pay it down early, as long as the payments are in multiples of the bi-weekly payment amount. Borrowing against a 401(k) is ususally a bad idea, as that money is not working for you, but taking it out now to use for a home may protect that money from a fickle market. It is a gamble, of course, but I lost 60% of the value of my 401(k) when the tech crash happened. It has come back, or course, but the market is in turmoil right now. My 401(k) took a $5,000 hit last month alone.
 
one thing to remember (using your 15 year pay back as a reference) is that is 15 years of growth you are losing. Also as others have stated, if you leave that employer within those 15 years you will probably pay it in full. My opinion is to never borrow against the 401k unless you are planning to pay it back really fast. The loss in the gains over time just seems way more important in the long run.



edit: good quote i just found while looking around for some info "Borrowers rationalize that they are paying interest to themselves, but they are forsaking higher investment returns, plus all the extra dollars compounding would have provided"
 
I'd hate to think of pulling money out of equities at their low though. I stayed through the tech downturn and it was painful, so was cautious with contributions going mostly to cash. Late 2002 put all back in equities. The returns over those years were signficant. Had I borrowed or withdrawn them in late 2002, they would be worth 1/2 of what they are today. The advantage that the market gives over the long haul more than makes up for the down periods. I agree with putting new contributions in cash. We've balanced new contributions 50/50 cash/equities since Oct. It's just that if you take money out at the low, you miss the bull years, which is the whole basis of the long term average returns. Ideally, you want to be putting more in at the low.



Look at this way... $40K in retirement fund with 8% avg return will grow to $402,506 in 30 years. If you allocated that $40K to DP, you'll pay a bit higher interest, but not 8%/yr and you probably won't have that mortgage for more than 7 years. A 1% higher interest rate on that $40K over 7 years will cost you $2885 in interest, tax deductible interest, so more likely only $1,904 after tax. Also, you would have paid taxes on the $40K saved outside of retirement at today's higher bracket. It really seems that 20% down for a first time buyer going into an SFR isn't always the best use of those dollars over tax deferred retirement contributions. If you just spend the $40K instead of saving it all, that's another story.
 
[quote author="Trooper" date=1215560839]First, pay off the car loan. </blockquote>


I think this is the exact wrong thing to do. Especially when he's trying to save for a down so he won't pay PMI!!!
 
[quote author="waiting_to_buy" date=1215565273]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.</blockquote>


I think you misunderstood your accountant. You may not take out anything from your 401k prematurely without paying tax and possibly penalties, but in some instances you may borrow from your 401k. The $10k limit is for IRAs.
 
Continue to fund your 401k and Roth and save for your down payment. Do not buy until you have 20% down and can afford a 15 year fixed on one income.
 
[quote author="awgee" date=1215575074][quote author="waiting_to_buy" date=1215565273]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.</blockquote>


I think you misunderstood your accountant. You may not take out anything from your 401k prematurely without paying tax and possibly penalties, but in some instances you may borrow from your 401k. The $10k limit is for IRAs.</blockquote>


really ? i could have sworn she said "take out without penalty".
 
[quote author="awgee" date=1215575357]Continue to fund your 401k and Roth and save for your down payment. Do not buy until you have 20% down and can afford a 15 year fixed on one income.</blockquote>


"can afford a 15 year fixed on one income." i dont think many people can do this, but of course that would be the best scenario.
 
[quote author="Trooper" date=1215574742]My reasoning: PMI is now tax deductible, interest on the car is not.</blockquote>


I understand, but he will spend more money by paying his car down than simply doing the monthly payments. This will leave him/her with less money for downpayment in 1 or 2 years. If he had a 5 year or more horizon, I would agree.
 
<em>"We are both in our early 30?s, and our gross annual household income last year was $198K" </em>



Oops, it appears that the PMI deduction phases out at 110K AGI, so I guess you wouldn't qualify for the write off....awgee, is this correct ?



I still say pay off the car. But that's just me.
 
[quote author="waiting_to_buy" date=1215575627][quote author="awgee" date=1215575357]Continue to fund your 401k and Roth and save for your down payment. Do not buy until you have 20% down and can afford a 15 year fixed on one income.</blockquote>


"can afford a 15 year fixed on one income." i dont think many people can do this, but of course that would be the best scenario.</blockquote>


Not even sure this is the best scenario...this is very conservative. I think that 28% is fine unless you plan on having kids, stop working or something similar. Otherwise 20% down, 3.2 x salary in mortgage is reasonable. All a matter of how much risk you can take and what your stability at work is.
 
[quote author="waiting_to_buy" date=1215575519][quote author="awgee" date=1215575074][quote author="waiting_to_buy" date=1215565273]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.</blockquote>


I think you misunderstood your accountant. You may not take out anything from your 401k prematurely without paying tax and possibly penalties, but in some instances you may borrow from your 401k. The $10k limit is for IRAs.</blockquote>


really ? i could have sworn she said "take out without penalty".</blockquote>


Straight from the IRS website.


<i><b>Can I withdraw funds penalty free from my 401(k) plan to purchase my first home?</b>




If you are under the age of 59 1/2, you cannot withdraw funds from your 401(k) plan to purchase your first home without being subject to a 10 percent additional tax on early distributions from qualified retirement plans. However, depending on the rules for your 401(k) plan, you may be able to borrow money from your 401(k) plan to purchase your first home. Your plan administrator should have written information about your particular plan that explains when you can borrow funds from your 401(k) plan as well as other plan rules. Publication 560 and Publication 575 and Tax Topic 424 and Tax Topic 558 are available for further guidance</i>
 
My 401(k) plan says the following: "Generally, interest on your plan loan isn't tax-deductible, as it is with a home equity loan or a mortgage, for example."



You would need to factor that as well.
 
[quote author="Trooper" date=1215575690]<em>"We are both in our early 30?s, and our gross annual household income last year was $198K" </em>



Oops, it appears that the PMI deduction phases out at 110K AGI, so I guess you wouldn't qualify for the write off....awgee, is this correct ?



I still say pay off the car. But that's just me.</blockquote>


Wow Sarge! I am impressed. How in the world did you know that?


PMI is also subject to total home mortgage interest limitations, and the PMI phase out starts out at $100,000 AGI or $50,000 for MFS.
 
[quote author="awgee" date=1215576101][quote author="waiting_to_buy" date=1215575519][quote author="awgee" date=1215575074][quote author="waiting_to_buy" date=1215565273]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.</blockquote>


I think you misunderstood your accountant. You may not take out anything from your 401k prematurely without paying tax and possibly penalties, but in some instances you may borrow from your 401k. The $10k limit is for IRAs.</blockquote>


really ? i could have sworn she said "take out without penalty".</blockquote>


Straight from the IRS website.


<i><b>Can I withdraw funds penalty free from my 401(k) plan to purchase my first home?</b>




If you are under the age of 59 1/2, you cannot withdraw funds from your 401(k) plan to purchase your first home without being subject to a 10 percent additional tax on early distributions from qualified retirement plans. However, depending on the rules for your 401(k) plan, you may be able to borrow money from your 401(k) plan to purchase your first home. Your plan administrator should have written information about your particular plan that explains when you can borrow funds from your 401(k) plan as well as other plan rules. Publication 560 and Publication 575 and Tax Topic 424 and Tax Topic 558 are available for further guidance</i></blockquote>


thanks awgee. Now this means I should change my 401k contributions back to 10% instead of 20%. I need more cash for my down payment.
 
[quote author="Trooper" date=1215576926]<em>"How in the world did you know that ?"</em>



Google is my friend.</blockquote>


You're a very good Internet researcher...you probably need more work to keep you busy!
 
<em>"you probably need more work to keep you busy!" </em>



My business is always good...... but if I could figure out how to do it, I'd change your avatar. It looks like a huge turd.
 
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