Profile picture for MosheBergman

Contribute to 401k when might want to get a mortgage at one point

Hello,

I am 30 years old, and now have a job that offers 401k plan (no matching yet). I wonder if contributing 10% to it will be a good idea considering the money is locked and all the penalties on withdrawal.

I might want to buy a house in 5/10 years, and investing the money myself (in ETF) will give me the flexibility to divert it for a down payment if I want to.

Assuming I am not able to save more than 10% at this point, is it worth it to contribute for the tax benefits and perhaps encountering penalties in the future or go with personal investing account?

Thanks
  • November 20 2012 - US
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Answers (2)

Profile picture for wetdawgs
Life's adventures are complex, and I commend you for thinking that starting to save for retirement now rather than later.   How to do it?  Saving in a 401k vs saving outside a 401k is not an all or nothing deal.   Putting money in a 401k makes a forced saving plan because the money is gone before you get your paycheck.   It isn't, however, a sensible way to save for a house (there are limits on borrowing for a house in the current laws plus penalties for early withdrawal) nor other things (cars, vacations, new pair of hiking boots, motorcycle etc)  that cost money.

Evaluate your budget.   Put some into the 401k, and some into regular savings.   When you hit 50 or 60 or 70, you'll be very glad for every penny in the 401k.  Meanwhile, your other savings can grow.   Pay yourself first by putting money in the other savings also.  What is reasonable?   Decide on a number and put it into saving on the day you get your paycheck.  Don't touch it (except to move it to sensible investments).   Live on what remains.

If you underfund your 401k at the beginning, each year when you get a raise put some of it into the 401k.   If your raise is 3%, bump your 401k contribution by 1% of your income.   Keep upping the amount until the 401k is fully funded.

It is very easy to spend every penny and live pay check to pay check and let every "want" become a "need" for instant gratification.  You can make the choice on the direction you will chose.

  • November 20 2012
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Moshe:

I suggest that you read about 401ks to understand their purpose and/or consult a tax advisor before you make any decisions
  • November 20 2012
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