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Buy a house, or max out 401k?

I've maxed out my employer's 401k match, but I could afford to save more. Should I keep putting money into the 401k and then a ROTH, or save to buy a house? I figure I need to buy a house in the next few years anyway. What should I be considering when deciding whether to put money into a retirement fund vs. real estate? Thanks!

Dec 09, 2014 by Cyril from Beverly Hills, CA in  |  Flag
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4 votes

Cyril, I think your questions has a short term and a long term answer. Short term it would be better to save and buy the house, long term with the power of compounding you would be better off saving for retirement. I think James is right sitting down with a hourly financial planner or CPA that can get to know you a little better is probably the best way to go.

Tim Hudson

Comment   |  Flag   |  Dec 10, 2014 from Summerville, SC

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2 votes

This depends to some extent on your circumstances. If you can buy a house that you will be comfortable in for a long time (at least 5 years), then it is beneficial in my view to get that ball started sooner rather than later. Plan to buy enough to be satisfied, but don't reach too far. Expensive houses come with expensive taxes, upkeep, maintenance, etc. Mortgage companies use guideline of housing costs (mortgage, taxes, insurance) should be no more than 25% of income, I like to use 20%, so that you can do things like take a vacation, save for retirement, etc.

Yes, it is important to save aggressively for retirement, but buying a house early in life has its advantages as well. For one, unlike rent, your mortgage expense never goes up. Over time, as income rises and mortgage payment stays flat, you will have greater discretionary income to save. Ultimately, you can be mortgage free before retirement - a superb goal.

The problem is that is impossible to really advise you personally without knowing more about your life. Married or single? Kids? Planting roots, or still mobile? How old? How much savings do you have OUTSIDE the 401k for emergencies. There are so many factors that go into financial decision making, it is hard to do this in an online forum. Might be better to sit down with an hourly fee financial planner for an hour to get personalized advice.

Comment   |  Flag   |  Dec 10, 2014 from Bridgewater, NJ

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Peter Cacioppo Level 16

Put maximum into the 401k since you will then pay less income tax. Then save for a house if; A.,you are buying in an area that should show increases in value over the next 10 years, and B.,you will be in a house for at least 3 years. Consider getting a roommate once you buy a house.

Comment   |  Flag   |  Dec 09, 2014 from La Jolla, CA

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John Essigman Level 17

Hi Cyril,

Agree with Peter but only to a point. Having savings and investment dollars both inside and outside of a qualified (401, IRA, etc) will provide some flexibility. Certainly continue to max out your 401(k) match but don’t do more than that as tax rules surrounding the 401(k) platform may prevent you from seeking out other opportunities. Yes, there is value in tax deferred IRA’s and tax free Roth’s but the tax rules are highly oppressive. Put some money into a savings account for emergencies and then continue to save for a house, both of these in non-IRA accounts.

Buying a home in an area where values are stable or increasing is a very good point. A house that no longer meets your housing needs can be sold later but be aware that it can take time. Alternatively, a house can be used as an investment via rentals or owner financed selling.

This is very general as I don’t know much about you…. be aware that investment real estate, rentals, and lease/purchase contracts can be illiquid, high risk, and highly irritating as you may need to be personally involved in the transactions. Absolutely become educated about real estate in your area. Consult with a fee-only advisor to help you work some numbers and see what is right for your unique circumstances.

Best wishes

Comment   |  Flag   |  Dec 10, 2014 from Cleveland, GA

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Thomas Larsen Level 5

The answer to the question is not either/or. It is both, if you are talking about your primary residence. The home should be a place to cook, sleep, and tuck kids into bed first, and an investment second. If you have a down payment shortfall for your home purchase, it is likely a good idea to (temporarily) reduce your 401(k) contribution rate.

As for the Roth IRA, a favorable strategy is to fund the 401(k) at the rate required to receive employer matching contributions. Next, fund your Roth IRA to the contribution limit. If you still have money left over to invest, go back to the 401(k) and top it off, or build savings for that house.

Comment   |  Flag   |  Dec 10, 2014 from Vail, CO

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Cyril, you've received some outstanding advice from the advisors above. You can always view a house purchase as investment diversification away from the stock market also, and historically a fair inflation hedge too. Good luck.

Comment   |  Flag   |  Feb 23, 2015 from Cedar Park, TX

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