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Should I be contributing more to my 401(k) account since I don't have an employer match, or should I put that money towards saving for a home?

I'm 35 years old and I'm currently contributing 10% to my 401(k) with no employer match. I contribute the maximum amount to my IRA account every year. I save $1,000 every month after taxes in an emergency fund. I don't have any debt. My goal is to save enough to purchase a home, but feel like that's a hard goal to achieve. Should I be contributing more to my 401(k) account since I don't have an employer match? Or should I put that money towards saving for a home?

Debt, Retirement, 401(k), IRAs, Real Estate
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January 2019

Congratulations on not having any debt and building up your Emergency fund.  

how about having your cake and eating it too!  Meaning... You can do both by contributing to your 401k and (when you are ready) accessing that money for a home purchase!

There are a few pitfalls with this idea:

  1. your 401k is volatile and your savings could drop dramatically just at the time you are wanting to access it for your purchase
  2. You may be best to "borrow" or take a loan from your 401k up to $50,000 or half of your balance.  I never encourage you to borrow from your future self, but it is an option.
  3. you may endure a 10% penalty if it is a non-qualified distribution (hence the loan may be best).
  4. The equity that you are building may not be that much.

Lets take a deep dive into each of these pitfalls:

#1, if this is a purchase that is going to be made in the next few years, you are best placing your money in a high yield online saving plan.  I suggest looking at bankrate.com for programs that are paying over 2% and fully liquid.  The reason to avoid putting this money in a 401k is that you want the money easily accessable at the time of your purchase.  In addition, the volatile may erode your savings.

#2 If you borrow from your 401k, be mindful of the challenges and the payback process.  At the end of the day, you will have to pay back this loan over the next 5/10 years and that will mean less cash flow.  Here is a good link that highlights these challenges:  https://www.investopedia.com/ask/answers/111815/can-401k-be-used-house-down-payment.asp


#3 The 10% penalty. Even though the distribution will be used towards the purchase of your first home, the first-time homebuyer exception does not apply to distributions from qualified plans like your 401(k)...  It applies to IRAs.  If you qualify as a first-time home buyer, you can withdraw up to $10,000 from your IRA to use as a down payment (or to help build a home) without having to pay the 10% early withdrawal penalty. However, Uncle Sam wants your money and you'll still have to pay regular income tax on the withdrawal. 

#4 Equity.  There are several good reasons to buy.  The one that tops my list is Pride Of Ownership.  Many are convinced that it is a fantastic wealth building tool.  Unfortunately, that is not always true.  You might find it beneficial to read this blog post from Eric Roberge, CFP® and fee only advisor.  Here is an in-depth review of building house equity and how it companies to renting in the big city:  https://beyondyourhammock.com/building-house-equity/.  

I hope this helps and points you in the right direction.  


With love and regards,


Jose Sanchez, CFP®

January 2019
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