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I graduated a year and a half ago, and for the past year I have been maximizing my 401K and Roth IRA contributions. I further save for a house downpayment.

Due to a recent surge in house prices, I feel like I'm not saving enough for a downpayment, and I was wondering whether it is the "right" financial move to decrease retirement contributions in order to increase downpayment funds.

I understand that there are certain "tricks" you can do, like transferring a certain amount from your 401K to a Roth IRA and then from the Roth use it as a downpayment, but I'm unsure of such limits.

Currently, I have $63,000 in savings, $5,500 in IRA, $12,000 in 401K, and I'm hoping to get to $100,000 for a house downpayment.

Thanks for your help.

  • What are your 401k plan rules on loans and in-service rollovers? – VBCPP Apr 8 '15 at 19:16
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What is your age? How much house do you intend to purchase? What is the employer match on your 401k? If you maintain your current saving strategy, how long will it take for your to reach your 100k down payment goal? Any other debt in the equation? Have you decided on a 15 year or 30 year mortgage (or some other duration)

63k is a nice downpayment on a reasonably priced home many regions of the country. You already have enough to avoid mortgage insurance on a home costing 315k or less. Because mortgage interest rates are likely to rise over the next year or two, you should calculate whether it makes sense to pull the trigger on a house with savings you already have. It might not pay off to wait and save if rates tick up and erode the advantage of making a larger downpayment.

Assuming that you do need or want to continue saving towards the 100k goal, then my advice is to contribute enough to your 401k at least enough to maximize your employer contribution, but no more. Throw whatever you can after that at other debt and saving for your goal.

IMO, the fact that rates are at near historic lows factors into your strategy.

Edit based on your comment: If mortgage rates were near their historic average, I would recommend that you just be patient and stick with your current savings plan.

But that isn't the case. Rates are near historic lows and you are close to having 20% down on a 400k house, which eliminates the cost of mortgage insurance. If I was in your situation, I would reduce my down payment goal from 100k to 80k, and maximize my savings towards that goal in an effort to get a house purchased sooner rather than later. The downside is that you throw away some free money and delay getting your retirement savings ramped up. You can make up for this since you are only 26.

I don't feel qualified enough to give advice on converting to a roth and then borrowing against it. I will let others tackle that.

  • My employer matches 35% with no limit. I'm 26 years old. I was looking to purchase a $375,000.00 house, but prices have risen since then, so I feel like I should either relocate, or keep savings towards the downpayment. I'm assuming in my scenario, that Roth-IRA is probably a no-no, correct? – script3r Apr 8 '15 at 17:44
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Absolutely max out any matching made by your employer on your retirement account because it's free money.

Beyond that, it's always a balance and it sounds like you are on the right track. Aim for the standard 20% down payment on a house in order to get the best interest rates. I'd stay away from converting/borrowing from a Roth when you're already so close to having a 20% down payment saved for a 375k house.

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