Dear Retirement Adviser,
I’m 30 years old and would like to purchase my first home in the near future. After a recent raise, I decided to set up my contributions to max out my 401(k) at $17,500 per year. My employer matches 50 percent of my contributions up to 6 percent. I also maxed out on my contributions to a Roth individual retirement account.
I have a dilemma. I could afford a home on my salary making maximum 401(k) contributions. However, I may want to go a bit beyond what my budget will allow with this level of retirement contributions. Would it be terribly irresponsible to dial back my 401(k) contributions and aim for a better home? From a balance sheet perspective, my sense is that we’re talking about simply shifting assets from my 401(k) to home equity. Still, the retirement saver in me thinks this could be a bad idea. Please help!
— Paul Ponders
There are other financial goals to accomplish in life besides investing to meet your income needs in retirement. But you can’t always tell that based on what television advertising suggests.
There’s such a high cost to getting the housing decision wrong that you’re wise to think carefully how to allocate income toward your goals. Decide to trade up in a few years and you’ve got moving costs, real estate commissions and potentially higher home prices and interest rates to pay.
At a minimum, you want to contribute up to the limits of any company match in your 401(k). You indicated that you’re contributing $17,500 to your 401(k) and another $5,500 in your Roth IRA. You’ll have to decide between dialing back contributions to the Roth IRA or the 401(k) plan, or both.
You should earn some return on the investment in your home over time, just like earning on retirement savings. Since most home purchases are leveraged through a mortgage, interest on a home loan should generate a tax deduction. Under current tax law, the first $250,000 in gains for a single filer and $500,000 in gains for a married couple filing jointly are tax-free when you sell. That’s provided you meet the ownership and use test for the property. These are all good reasons to buy a nicer home now that will meet your needs over time as opposed to maxing out your retirement savings.
Get more news, money-saving tips and expert advice by signing up for a free Bankrate newsletter.
Ask the adviser