Stop contributing to 401K to build up downpayment?

[Safire]

Title says it all.

We were thinking of planning to buy next year, but then of course, the interest rates went up, home prices are still very high in our area and our down-payment will need to be a bit more to make up for those high interest rates. Husband thinks we should put a pause on contributing to the 401K for the next 18 months to build up that down-payment.

I am a little unsure because contributing now when the market is down might help us DCA better. But I also want to get into a house ASAP as he's already 50+ and we don't want to be renting or still paying off a home in retirement. Any advice for us?

Thanks.

 

[target2019]

If you want to buy a home, and you need paycheck to save for downpayment, then you have your answer.

But you may be able to sacrifice something else to help fund the downpayment. You may still need to lower the 401(k) contribution, but you can see the future benefit of DCA into lower prices.

 

[FLSUnFIRE]

You may be able to borrow from your 401K for your down payment.



Benefit is the "money" is in the 401K/tax break (can not go back and put it in later) and you'd be loaning to yourself. Downsides are possible opportunity cost (but if the other option not to contribute anyway that's a wash), credit risk (penalty if you default paying yourself back making it an unqualified distribution), and being tied to your employer/having to pay back full balance if you leave your employer or face an unqualified distribution.


I borrowed from mine to raise some of the cash (primarily to avoid selling as much in my taxable) when I bought my home and have no regrets. I did pay it down/off aggressively.

 

[pb4uski]

Title says it all.

We were thinking of planning to buy next year, but then of course, the interest rates went up, home prices are still very high in our area and our down-payment will need to be a bit more to make up for those high interest rates. Husband thinks we should put a pause on contributing to the 401K for the next 18 months to build up that down-payment.

I am a little unsure because contributing now when the market is down might help us DCA better. But I also want to get into a house ASAP as he's already 50+ and we don't want to be renting or still paying off a home in retirement. Any advice for us?

Thanks.

If your employer offers a match, do that.. don't turn away free money... and then save the rest in taxable accounts that you'll have ready access to. If needed, you can always consider a 401k loan for part of the down payment.

Just don't forget that to the extend that you scale back 401k contributions that your income will be higher and your income taxes will be higher when you file your 2022 tax return.

 

[old medic]

My thinking is the 401K contributions decreases your taxes, so you keep more of your money, a good chance it will be worth more once this economy gets turned around, and you still have the money to borrow against... Just look into it to make sure you can convert it to pay off as a loan before you retire.

 

[OldShooter]

From a financial point of view, this is a a bad idea. First, you will only recover maybe 2/3 of the 401k contribution that you have been making; the balance will go to taxes. Second, assuming an employer match, you will be leaving free money on the table. Third, as you observe, you will miss buying cheap stocks prior to a recovery.

A house is a real financial dice roll right now, particularly in markets where there has been big appreciation. Many argue that overall house prices are inflated, so there is the risk of becoming upside down in your mortgage. Second, out-migration from expensive markets is putting extra pressure on those markets. California and other expensive states are seeing high-earners leave and being somewhat replaced by immigrants who have no prayer of buy the the houses the departing owners are selling. So more downward pressure on prices.

All that said, not all of our decisions have to be financial optimization. You want "ASAP" but really you can afford to be a bit patient, maybe for a couple of years to see how the stock market and the housing market move. So maybe that is a tactical move for you while continuing to save for that down payment. If "ASAP" meants "now" then you should probably resign yourself to the fact that this is likely to be a bad financial move for you, though maybe a personally satisfying one. Just IMO.

 

[Romer]

20 years ago I was in a similar boat and decided to take out a 401K loan instead. The reason is the matching contributions AND that I would be paying myself interest and eventually (over 5 years) pay back the loan.

At the time tough we were not in a low point of the market like we are now. If you do the math and the loan works better, I would wait until before you are ready to buy as by next year the market could be back in an upswing

Just a thought related to what I did. Each situation is different and you are the best judge

Like for example if you get 50% matching, then that is a 50% return on keeping the contributions vs the factors for a loan

 

[copyright1997reloaded]

Title says it all.

We were thinking of planning to buy next year, but then of course, the interest rates went up, home prices are still very high in our area and our down-payment will need to be a bit more to make up for those high interest rates. Husband thinks we should put a pause on contributing to the 401K for the next 18 months to build up that down-payment.

I am a little unsure because contributing now when the market is down might help us DCA better. But I also want to get into a house ASAP as he's already 50+ and we don't want to be renting or still paying off a home in retirement. Any advice for us?

Thanks.

If your employer offers a match, I would try to do at least that much in terms of 401k.

But my first question is whether you have an six month emergency fund? If not, that should take top priority over a house (and perhaps even over the 401K match). If you don't, figure out your base-bones budget (e.g. what you would need if there was no job income coming in and perhaps if you had to pay for health benefits due to not working), and use that baseline budget * 6 to figure out what cash (checking, savings, CD's) you need.

 

[livingalmostlarge]

depends i think. I think 401k loan as well also depends on how much are you saving? $40k