First Time Home Buyer (Savings Question)

[Cod]

My wife and I are beginning to save for our first house and I had a question about saving for a down payment. What is the best option in saving for a house? Traditional savings account, IRA, or other? I was thinking an IRA option, but I'm still learning the financial game. I know with a traditional IRA you can withdraw up to $10,000 without penalty as a first time home buyer; however, I'm unsure if there is a limit for the Roth IRA. Every place I read just stated you can withdraw from a Roth IRA without penalty for first time home buying.

On a plus side, my family is in good condition right now because we live, in essence, rent free due to my military commitments. Also, we have more than enough money in savings and a decent retirement nestegg for our ages.

Any help is greatly appreciated.

 

[Ivan Seeking]

The last time I checked, I was getting about a quarter of a percent interest on my savings account. At that rate, you might as well put the money under the bed mattress.

 

[Insanity]

Unless the rules have changed recently, the $10,000 withdraw for new homebuyers (also includes building or rebuilding a first home) is the same for both a Trad & Roth IRA. There are specific details to that rule, so find an adviser you can trust about this. Don't just withdraw $10,000 on your own.

Saving accounts & CDs at banks are actually about the worst place to keep money for long term purposes with the low rate of return.

Their are financial companies and representatives that will help people invest in mutual funds monthly, and there is a diversity of mutual funds to meet everyone needs. Even some for which the return is exempt from federal taxes.

For a shorter term goal such as a down payment, a bond fund might be best. Better return then bank, not a volatile as equity stocks.

 

[Vanadium 50]

Many people are giving you advice without asking the question "When do you need the money"? Where you should put it is a strong function of when you need it.

As an example, if you are putting $1000 a month away for 10 months at 0.75%, the difference between having the interest taxable and not works out to about $7.

 

[BishopUser]

If you are looking to buy a home in the next 5 years I'd say savings account. ING gives me 1.1% and I think ally bank is giving around 1.25% atm. 5 years is way too short to try the stock market unless you create a very conservative portfolio (even then you can lose money!) in which case you might as well just use a savings acount - less hassle/paperwork etc.


Since it is short term saving, I would just focus on good budgeting rather than focusing on where I can make a few extra dollars in a savings/market account.

 

[Cod]

Thanks for the advice everyone. To answer Vanadium's question, the timeline for a down payment is a bit "up in the air". I'm not exactly sure when I'll be getting out of the military. It could be three years (earliest) or 20 years (latest). Right now I'm leaning towards 20 years since I'll be able to pull in a decent pension and only be 41 years old, which is still young enough to get a job.

 

[airborne18]

If you are in the military, then stick to CD's. You can get better than average rates with the military credit unions. Since the rates are so low, don't lock into long term CD's, or get CD's that allow you to change the rate once.

( rates will be going up bigtime when the economy improves. The Fed has already asserted this fact, and they control rates. ).

The problem with mutual funds is that there have been so many boom and bust moments in the market that they have negative returns for the 3 and 5 year. From 9/11 to present day there has been no return for your risk, so just avoid it. You are in the military and you should not worry about where your money is.

 

[Astronuc]

As Vanadium indicated it depends on one's time horizon.

Money markets/saving accounts are paying rather low interest rates (~1%), and that could increase once the Fed and others start raising interest rates. Some bonds pay a little more like the 2-3% range. One could look at tax free municipal bonds.

Or one could look into purchasing equities (stocks) of reputable companies.

Right now GE's common stock is about $14.71 per share (close Fri, Aug 26).
EPS (ttm): 0.96
Div & Yield: 0.48 (3.30%)

Disclaimer: No endorsement is expressed or implied.

So one can get a reasonable return and the stock may appreciate. Of course it could go down in the near term if the economy softens.

One could put some money in cash investment for liquidity, some in bonds and some in equities. Really high yields usually imply riskier investments, e.g., hedge funds.