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?
First of all, congrats on being in a stellar financial position. You are doing all the right things by saving into your 401(k), maxing out your IRA, and keeping an emergency fund. 401(k)'s do not have distribution exemptions for a home purchase so if you were to take the funds out of your 401(k) for a down payment, you would have to pay the 10% penalty plus ordinary income tax, so this is not a good option for you. You could take the money out as a loan up to $50k or half the value of the account, whichever is less. The downsides to this are you'd have to pay it back with interest and you'd be forced to make monthly payments back to your 401(k) in the form of payroll deductions. As long as you plan to stay at your current employer long enough and can handle the payments, this can be a solid option for you. If your IRA is a Roth and you've held the account for at least 5 years, you can take out any contributions you made to it tax and penalty-free. You can also take out up to $10k in earnings without penalty or tax as long as it is used for the purchase, repair, or remodel of your first home. If your IRA is a traditional IRA, then you can only withdraw up to $10k for a home purchase without paying any penalty, but you must pay ordinary income tax on the entire amount AND purchase the home within 120 days or you'll be fined the 10% penalty. If none of these options make sense for you, then you may want to consider lowering your contributions to your 401(k), especially considering you don't have an employer match, and instead fund a standard brokerage account with a portfolio suitable to your risk tolerance and the time horizon (how long until it's needed for down payment) for the funds, or simply put it into your savings account. American Express has a high yield, FDIC-insured savings account right now that pays around 1.45% right now (see here), so that could be a good option if you want to go the cash savings route. One thing to note about reducing your 401(k) contributions, be careful about how much you chose to reduce as this could potentially bump you into a higher tax bracket and effectively defeat the entire purpose of the reduced contributions in the first place.
The biggest mistake I see investors make is saving too much in retirement accounts for the tax deduction. Then don't have enough on the outside for alternative investments or a downpayment on a home. You could do a Roth IRA where you can take out any or all contributions for any reason at any time penalty & tax free because you already paid the tax on the contributions. This way it could be a hybrid savings/investing account while a retirement account as well.
Normally, a good rule of thumb is to save 30% to 40% on the outside & 60% to 70% in retirement accounts. This leave you flexible enough to handle "life" as well as retirement. These are just my thoughts without knowing enough of your details like how much you already have saved outside your retirement accounts versus how much you have inside your retirement accounts.
Hope this helps and best of luck, Dan Stewart CFA®
Great job being in your position! That takes dedication and forethought. There is no real incentive for contributing to a 401(k) if there is no employer match. You can still defer taxes with a traditional IRA and typically have access to more or better funds. Based on your income, an even better option would be a Roth IRA so you can enjoy tax-free growth and qualified withdrawals. I recommend also opening individual taxable accounts for your emergency fund and home purchase. You portfolio can be allocated more conservatively based on your goals and time horizon. After you max out your IRA contribution ($5,500 in 2018) and meet your emergency fund and home goals, you could add to the 401(k) as a spillover bucket (max = $18,500 in 2018). However, if you do not need the tax deferral now, you have more flexibility with an individual taxable account that can be more aggressive for building wealth (in addition to the home and emergency fund).