401K (short term) vs checking account (bank)

[mtukhi123]

Hello All,
I graduated from college about 4 years ago. I changed my first job after two years and now I am on my second. When I left my first job, I took out all my 401K funds, paid the penalty for withdrawing and paid taxes. I realized I got more compare to If I simply did not contribute and took the fund from my pay check and paid the taxes right away.

Now, my question is, is it better for me to contribute more (like 20%) to my 401K and later withdraw it after two years or just keep saving in the bank for two years. I will need cash in about two years because I am planning to buy(finance) my first home with FHA loan and will need down payment.

In first case, I will be paying taxes right away and saving it in my bank account. In second, I will be contributing that amount to 401K and withdrawing it after 2 years with penalty and tax. FYI, 88% of my 401K is in stocks. Also, can you tell me if we get dividends from stocks in 401K?

[mtukhi123]

Thank you all.

[pacergal]

I believe you are approaching your 401k incorrectly--it is for long term investing for Retirement. Short term monies needed probably should not be invested into stocks. You can contribute to both, pre-tax to a 401k and post tax saving for goals--such as house or car. Others more versed in this will be able to give you more information.

[Walt34]

What pacergal said. Also, taking the funds from the 404k may push you into a higher tax bracket so you end up paying more in taxes than if you'd just put the after-tax money in a savings account or money market fund. And for a short term goal like a house down payment you're risking investment losses, which don't matter for a long-term goal like retirement but may matter a lot for a short-term goal.

[Big_Hitter]

can't you take loans out of your 401k?

[bingybear]

Quote:

Originally Posted by mtukhi123 Hello All, In first case, I will be paying taxes right away and saving it in my bank account. In second, I will be contributing that amount to 401K and withdrawing it after 2 years with penalty and tax. FYI, 88% of my 401K is in stocks. Also, can you tell me if we get dividends from stocks in 401K?

If the stocks you have in a 401k pay dividends, then you will get the dividends. However, they will be in the 401k.
I agree with others that this is not what a 401k is for.
However, you can work the numbers to see how it works out.

I really never looked at taking out a 401k early. I always assumed you had to leave the job or have a qualifying hardship to totally withdraw. Loans were the other choice.

[jazz4cash]

I think it was a mistake to take funds from your old 401k plan and pay taxes and penalties. You could have left them alone until you started your new job or rolled the funds into an IRA to avoid taxes and penalties. As far as future contributions I agree you need to contribute to both 401k and a taxable money market or online savings account. If you have IRA funds you can use them to buy your 1st home but you still have taxes to pay but no penalty.

[audreyh1]

You don't use your 401K to save money for a house downpayment. You only use it to accumulate funds for when you reach retirement age. No, a 401K will not provide dividend income until after you retire and start withdrawing from it without penalty. The dividends stay in the 401K and should be reinvested until retirement age.

Use a regular savings account to save for your house down payment, and don't put that money in stocks.