Saving up for house down payment..

[RadMD]

Greetings all!  Been lurking for awhile and really appreciate all of the good information here.

Quick question:  I have maxed out all tax advantaged accounts (my SEP-IRA, wife's 401k, etc.) and want to start setting aside an account to build up a nice down payment for a house.

Since I will be using these funds within the next 5-10 years, will it hurt to put the funds into a taxable account at Vanguard so that the money will "work" for me?  If so, what funds would you invest in?  75% Total stock market and 25% muni bonds?  Should I just leave it in a 1% savings account?

Thanks in advance!

[jz]

Any money that you need within 3-4 years should not be at risk in the stock markets.   Your time line is longer, so you might invest in a medium risk, diversified muni/stock/foreign/emerging portfolio for 2-5 years and then scale down the risk. Consider a robo with a medium risk setting.

[Ryan]

For just about anyone, the answer is to put it in a savings account. If you go with an index fund-- in addition to complicating things when it comes time to get a lender, you're not talking about a huge amount of gained interest compared to the risks involved (like a 30% stock downturn right after you thought you had saved enough).

[DMFA]

75% equity might be a bit much risk for money you'll need to use in the short-ish term.  On the other hand, you won't gain much from 1% at all.

I personally like to go 50/50 for short-ish term money.  A fund that achieves this, as well as tax efficiency, is Vanguard's Tax-Managed Balanced fund VTMFX.  You'll get a little bit of risk for that fair amount of gain.  I know the past is not the future, but 7.96% and 6.29% at 5 and 10 years respectively is better than the 1% which won't even keep up with inflation and less risk than a plan higher in equities for the short-term.

On a slightly different subject, curious as to why you chose a SEP-IRA - it might not be a bad choice for your circumstances, but if you use an individual 401(k) it opens up the ability for you to make more tax-advantaged retirement savings/investment in the form of a "backdoor" Roth IRA, i.e. non-deductible TIRA contribution followed by a Roth conversion.  You wife should be able to do that as well, adding another $11,000 annually in tax-advantaged space and giving you a good place for your tax-inefficient assets like REITs, if you hold them.

[RadMD]

DMFA wrote:

75% equity might be a bit much risk for money you’ll need to use in the short-ish term.  On the other hand, you won’t gain much from 1% at all.

I personally like to go 50/50 for short-ish term money.  A fund that achieves this, as well as tax efficiency, is Vanguard’s Tax-Managed Balanced fund VTMFX.  You’ll get a little bit of risk for that fair amount of gain.  I know the past is not the future, but 7.96% and 6.29% at 5 and 10 years respectively is better than the 1% which won’t even keep up with inflation and less risk than a plan higher in equities for the short-term.

On a slightly different subject, curious as to why you chose a SEP-IRA – it might not be a bad choice for your circumstances, but if you use an individual 401(k) it opens up the ability for you to make more tax-advantaged retirement savings/investment in the form of a “backdoor” Roth IRA, i.e. non-deductible TIRA contribution followed by a Roth conversion.  You wife should be able to do that as well, adding another $11,000 annually in tax-advantaged space and giving you a good place for your tax-inefficient assets like REITs, if you hold them.

Click to expand...

Thank you all for the quick replies!

@DMFA  It was my understanding that Vanguard does not let you roll over an IRA into a 401k?  The SEP-IRA was pretty easy to setup at Vanguard, that's why I started out with that.

[DMFA]

RadMD wrote:

DMFA wrote:

75% equity might be a bit much risk for money you’ll need to use in the short-ish term.  On the other hand, you won’t gain much from 1% at all.

I personally like to go 50/50 for short-ish term money.  A fund that achieves this, as well as tax efficiency, is Vanguard’s Tax-Managed Balanced fund VTMFX.  You’ll get a little bit of risk for that fair amount of gain.  I know the past is not the future, but 7.96% and 6.29% at 5 and 10 years respectively is better than the 1% which won’t even keep up with inflation and less risk than a plan higher in equities for the short-term.

On a slightly different subject, curious as to why you chose a SEP-IRA – it might not be a bad choice for your circumstances, but if you use an individual 401(k) it opens up the ability for you to make more tax-advantaged retirement savings/investment in the form of a “backdoor” Roth IRA, i.e. non-deductible TIRA contribution followed by a Roth conversion.  You wife should be able to do that as well, adding another $11,000 annually in tax-advantaged space and giving you a good place for your tax-inefficient assets like REITs, if you hold them.

Click to expand…

Thank you all for the quick replies!

@dmfa  It was my understanding that Vanguard does not let you roll over an IRA into a 401k?  The SEP-IRA was pretty easy to setup at Vanguard, that’s why I started out with that.

Click to expand...

That is correct. It's strange that they wouldn't when so many of their direct competitors do. They also don't have admiral shares for their indie 401(k).

Fido and Schwab seem like the common go-to for this. Roth is an important tool in asset allocation for tax-inefficient holdings. You should decide if you'd rather stick with an institution, or have an additional $5,500 (at least for you, your spouse should do it too, esp if she has no pretax IRAs like a traditional or SEP) in tax-free investments each year.

Since you'll probably only do one trade per year, if you want Vanguard funds badly enough (though the Fido/Schwab main funds are p much equivalent), the per-trade fees probably won't hurt much.

Anyway, you're not wrong to do what you're doing. It's just food for thought.