A friend is using his 401k to save up a deposit for a house.

[thegimp03]

Well, a person can technically withdraw from the 401k account before retirement without too much of a tax benefit if it's for a "financial hardship" I think. But rather than worry about that, your friend should be saving his money for a house in a savings account. 401k accounts should be a last resort.

 

[fisheerman]

Originally posted by: GoPackGo

Originally posted by: Fritzo
Wow...tell him to search for his idea and Google, and I will give him $50 if the first 100 hits are not articles on why this is a TERRIBLE idea.

He should be dumping as much money as he can in his 401K right now- funds are so cheap that he has a lot of buying power. When the economy picks up, he could be as much as 50% ahead of the curve at retirement.

You assume that its not going to keep going down.

I wouldn't put any money into 401k until we hit the bottom.

Dow will hit somewhere between 1000-2000.

If we hit this ^^^^^ range then you will not have to worry because there will be no 401ks or civilization as we know it.:shocked:

 

[Suspicious-Teach8788]

Originally posted by: Fritzo

Originally posted by: GoPackGo

Originally posted by: Fritzo
Wow...tell him to search for his idea and Google, and I will give him $50 if the first 100 hits are not articles on why this is a TERRIBLE idea.

He should be dumping as much money as he can in his 401K right now- funds are so cheap that he has a lot of buying power. When the economy picks up, he could be as much as 50% ahead of the curve at retirement.

You assume that its not going to keep going down.

I wouldn't put any money into 401k until we hit the bottom.

Dow will hit somewhere between 1000-2000.

Uh...yeah...let me guess, those are just the first numbers that poppped into your head? I'm fairly certain we're not going to see the Dow go below 6000 anytime soon, and plus the Dow is just an average. Some of my funds are actually doing fairly well. This guys is going to retire in 35 years. If he buys a ton of cheap funds and we have a rocky 2-3 years, he'll be that much better in 35.

Why are people so stupid about 401ks?

You should max out a 401k
1) It's tax deferred.
2) Employers often contribute too.
3) Compounding interest.
4) Put your 401k funds in cash or something conservative like a bond fund FOR NOW.

Just because your money is in a 401k doesn't mean its dropping like a rock. My 401k return from June 07 till now is actually positive. Know where to put your money and when to do it, that's key. Yeah if you held on to stock funds you're looking at -40% last year, then yeah. Tough.

 

[spidey07]

DLeRium,

You are spot on. But people look at their 401ks and see all that money and then the loss.
WHAT THEY DON'T UNDERSTAND IS YOUR ACTUAL CASH IN HASN'T LOST ANYTHING. They see all the gains and the matching contributions and the overall worth of everything down dramatically.

But for the most part they still have the actual value of the cash they put in, depending on how long of course. So easy, non mathematical stuff, over 5 years.
You put in 10K a year = 50K out of your pocket but it's really 40K out of your pocket just from taxes if not more, but let's make it simple.
Company match is 50K
That means you have 100K in there
Add growth and it's more like 135K.
Your 401k lost half it's value the last year.
That's 62.5K

What is greater? 62.5K or 40K?

And that's not even taking into account compounded returns!!! If you want to retire by 50 or even before then follow what DaveSimmons outlined.

 

[JS80]

Personally I think the stock market will trade in a bear range for the next 10 years. But that's just me.

 

[joetony09]

exciting fascinating

 

[puffff]

Originally posted by: BurnItDwn
Wasting 401K money on a house down payment is a HORRIBLE idea. 401K money should be saved for retirement. 401K is safe from banks taking it away during bankruptcy, so if he winds up getting fired, etc .... he should not touch that money at all.

Best way to save for a house is savings account, savings CD, money market account, mutual funds, stock market, or many many other accounts. Lowest risk would be savings account.

What if the company matched contributions? Like for every dollar he put in, the company put in a dollar too... that's like an instantaneous 100% return right there. I can't think of a faster way to save up down payment money.

 

[DaveSimmons]

Originally posted by: puffff

Originally posted by: BurnItDwn
Wasting 401K money on a house down payment is a HORRIBLE idea. 401K money should be saved for retirement. 401K is safe from banks taking it away during bankruptcy, so if he winds up getting fired, etc .... he should not touch that money at all.

Best way to save for a house is savings account, savings CD, money market account, mutual funds, stock market, or many many other accounts. Lowest risk would be savings account.

What if the company matched contributions? Like for every dollar he put in, the company put in a dollar too... that's like an instantaneous 100% return right there. I can't think of a faster way to save up down payment money.

BurnItDwn was saying to do both: 401k for retirement, plus a separate savings account for the down payment.

A person who can't do both probably isn't responsible enough to be buying a house.

 

[Special K]

Originally posted by: DaveSimmons
Most 401k plans only let you take money out with each paycheck, they don't let you catch up later in a lump sum when you magically know the markets have reached the bottom.

True, although you can always direct your contributions to a money market fund and then transfer the lump sum into stocks later.

Of course, studies have shown that most people who try to time the market end up underperforming it in the long run.

 

[Special K]

Originally posted by: DLeRium
Just because your money is in a 401k doesn't mean its dropping like a rock. My 401k return from June 07 till now is actually positive. Know where to put your money and when to do it, that's key. Yeah if you held on to stock funds you're looking at -40% last year, then yeah. Tough.

Sure, let me get out my crystal ball so I can see when the market will peak so I know when to sell, and when it bottoms out so I know when to buy. Every academic study done on market timing has demonstrated that most people are poor market timers and will end up doing worse in the long run if they try to time the market rather than buy and hold.

You may have gotten out before the crash, but will you get in before the upswing? Can you correctly predict all the boom/bust cycles that will occur during your lifetime?

Unless you are privy to secret information that no one else is, your guesses about which way the market is going are just that - guesses.

 

[DaveSimmons]

Originally posted by: Special K

Originally posted by: DaveSimmons
Most 401k plans only let you take money out with each paycheck, they don't let you catch up later in a lump sum when you magically know the markets have reached the bottom.

True, although you can always direct your contributions to a money market fund and then transfer the lump sum into stocks later.

Of course, studies have shown that most people who try to time the market end up underperforming it in the long run.

Even more reason to ignore GoPackGo's advice 🙂

But yes, market timing is rolling the dice, dollar cost averaging with steady stock index buys in your 401k is a safer long-term strategy.

 

[Gunslinger08]

It's crazy that stocks are the only thing people buy less of when they're on sale.

 

[Indolent]

Originally posted by: Mo0o

Originally posted by: GoPackGo

Originally posted by: Fritzo
Wow...tell him to search for his idea and Google, and I will give him $50 if the first 100 hits are not articles on why this is a TERRIBLE idea.

He should be dumping as much money as he can in his 401K right now- funds are so cheap that he has a lot of buying power. When the economy picks up, he could be as much as 50% ahead of the curve at retirement.

You assume that its not going to keep going down.

I wouldn't put any money into 401k until we hit the bottom.

Dow will hit somewhere between 1000-2000.

Willing to bet on that?

He is already betting on it by not investing now.

 

[Denithor]

Rollover into IRA then take up to $10K for first home purchase.

But yeah, if your buddy honestly planned to use this money in the next five years or so, he should have invested it (and any company matching funds) into the guaranteed interest/money market/etc option for preservation & stability.

Money you may need shorter term, invested into the stock market = no better than tossing it at a craps table or roulette wheel.

 

[CPA]

Originally posted by: KeithTalent
Our 401K equivalent (RRSP) allows you to borrow a certain amount (25K IIRC) out of it, tax free, for the down payment on a first home as long as you repay it within 15 years (again IIRC) . Is there nothing like that in the U.S.?

KT

It varies by plan, but most allow a loan of up to 50% or $50K of the value to be paid back over 5 years or less.

 

[CPA]

Originally posted by: thegimp03
Well, a person can technically withdraw from the 401k account before retirement without too much of a tax benefit if it's for a "financial hardship" I think. But rather than worry about that, your friend should be saving his money for a house in a savings account. 401k accounts should be a last resort.

Even with a hardship, you incur 25% fed rate, plus state and local taxes, PLUS the dreaded 10% penalty.

 

[XxPrOdiGyxX]

Christ, it's not your rainy day fund. It's for your future. It's already been said, but, timing the market is very difficult (at best) and you will most likely do worse than if you just leave it alone. 401k allows you to shelter some of your income so you don't get taxed as much and your company probably matches to some degree. You are going to get hit with penalties and then miss out on dollar cost averaging when the market hits its upswing. Because of where the market is you can buy more stock per dollar. When the economy starts recovering you have a huge potential to make money.

 

[Martimus]

If you are saving for a house, use something that isn't likely to lose money - like a CD, or even a savings account.

I have saved up $25K over the last 3 years in a simple savings account just for this purpose. I chose a savings account over a CD because I can withdraw from it at any time in the case of an emergency; but it does earn less interest. A money market account would work as well. If I had put that money in the stock market, I would be SOL right now.

If he can put aside $200 a pay period (every two weeks for me), that ends up being $10K in two years. Add any tax refunds to that and he may have a sizable downpayment in only a couple of years.

 

[PhaZe]

I start working full time in January, (graduate this December) and wanted to know what the safest way to handle a 401k would be. Can you "just" save money in there without using the stock market?

disclaimer: I am ignorant regarding 401k, roth ira and related devices. 😛

 

[dmw16]

Some good advice here and some utterly stupid advice.

A 401K is not for general savings, it is for retirement.

A 401K does not need to be maxed out while saving for a house, but you should atleast put in enough to maximize any employer matching.

You can sell your shares within your 401K and buy stable funds or even keep it in a money market within your 401K. Pulling it out and putting it in CDs (as a PP said) is fucking retarded.

 

[Special K]

Originally posted by: PhaZe
I start working full time in January, (graduate this December) and wanted to know what the safest way to handle a 401k would be. Can you "just" save money in there without using the stock market?

disclaimer: I am ignorant regarding 401k, roth ira and related devices. 😛

There should be a money market fund option, which basically behaves like a savings account without the FDIC insurance. Having said that, I doubt the government would allow a money market fund to lose money in this environment.

 

[PingSpike]

Originally posted by: joshsquall
It's crazy that stocks are the only thing people buy less of when they're on sale.

Not really. They wouldn't be on sale if people weren't buying less of them.