Dear Dr. Don,
I am 28 years old and working as a consultant. I do not have a 401(k) at work. What is the best way to invest that will allow me to see some returns and also defer taxes? Down the line, maybe next year, I am thinking of buying my first home as well. Any advice is greatly appreciated.

— Su Situation

Dear Su,
I like when people in their 20s start to invest for retirement, but if you’re just going to raid the retirement fund next year to make a down payment on a first home, then that’s not saving for retirement. Ideally, you’d be working toward both life goals: saving for the down payment on the house and putting aside money for retirement. If you have to choose one or the other, work on the more immediate goal first, then switch your sights to the next goal.

Don’t let taxes be the tail wagging the dog when it comes to achieving your financial goals. While you can contribute to a traditional individual retirement account and achieve your objective of tax-deferred investing, then take the money out next year using the first-time homebuyer’s exemption, you would only be putting off the income taxes by one year while managing to avoid the 10 percent penalty tax on early withdrawals. If your marginal income tax rate next year will be the same as this year’s, then you won’t be accomplishing much.

With a one-year planning horizon for the home purchase, I don’t advise swinging for the fences as you invest the money. Stay conservative, and don’t take risks with your savings for the down payment.

Think through how you plan to finance that new home. You can finance it with as little as 3.5 percent down with a Federal Housing Administration loan. While there are costs associated with using this type of financing — including the triggering of mortgage insurance premiums — you can balance those costs against the potential for rising home prices and mortgage interest rates.

Compare the FHA route with the costs of conventional financing. You may decide it’s worth it to go with an FHA loan and get into your first home sooner, rather than saving up for a 10 percent to 20 percent down payment with conventional financing.

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