Not maxing out 401k in favor of saving for a house?
May 23, 2016 5:35 PM   Subscribe

All the financial advice I see recommends maxing out tax-advantaged retirement accounts, which is what we've started to do. However, we don't know if we'll retire in the US. Should we redirect some of those funds to short-term savings? Snowflakes below.

Spouse and I both are both citizens of another country (that doesn't have a tax treaty with the US). We have been here since graduate school. Because we spent most of our 20s getting PhDs, we started retirement savings pretty late. We're now in our early 30s, and have accumulated about $150k in 401k's between us, and started maxing them out last year. I'm also maxing out my Roth IRA.

I'm worried that this is a short-sighted move because we don't know if we'll retire in the US, and given this uncertainty, it feels like a house would be a better long-term asset.

We live in a high cost-of-living city, so there isn't much left after rent and retirement savings. We do save every month for a downpayment, but we could accelerate it if we minimize our future 401k contributions (i.e., only contribute enough to get a match).

Advice from anyone who is or has been in this boat?

Relevant variables: we have emergency savings, no debt, and no kids (but planning on them in the next couple of years).
posted by redlines to Work & Money (13 answers total) 4 users marked this as a favorite
A house that you don't intend to live in during retirement is not generally considered a replacement for retirement savings.

More specifically, if you want to buy a house as 'potential retirement savings' because you are worried about tax treatment of your 401k when you retire to your home country, you need to figure out exactly how income from selling or renting out the house would be handled when you retire to your home country, in order to know if it is even theoretically better than a 401k for taxes. Without knowing what country you're from, you probably won't get that answered here.
posted by the agents of KAOS at 5:47 PM on May 23, 2016 [1 favorite]

To clarify, the house is not just for retirement savings, but for short-term rental savings and stability as well.
posted by redlines at 5:53 PM on May 23, 2016

You are allowed to pull out some amount of funds from your 401(k) to fund a home purchase*. Talk to a mortgage broker about buying a house and they will give you loads of information. Balance this against the fact that they earn money if you take out a mortgage. Read The Index Card for simple and direct advice about saving for retirement, having an emergency fund and buying a home. And from where I sit, you are doing an amazing job. Keep doing that.

*First link I grabbed from Google, do additional research.
posted by amanda at 6:06 PM on May 23, 2016

Yeah. You don't need to max out all these retirement savings vehicles. 150k is a good start. If you're saving about 10% of your income for retirement, you're doing great. Redirect some of this to short term savings for emergency funds, baby moon, and your home down-payment.
posted by Kalmya at 6:41 PM on May 23, 2016

There are two principle advantages to a 401(k) over post-tax accounts. One, they allow you to shift the income tax burden on the money to your retirement years, when you may have lower income and thus a lower marginal rate. Two, they allow the money to grow tax free (no dividend tax or cap gains tax if you rebalance your portfolio).

If you were to retire outside of the US, number one might be a significant advantage. Depending on your income, you might pay 33% of that $18K in income taxes if you take it as income now, but almost nothing if you take it in retirement (depending on whether or not you have other tax obligations to the US in retirement, which you may not if you are not permanent residents or citizens and live abroad). Number two is an advantage as well.

You will lose these tax advantages if you stop contributing. You should consider taking loans from your 401(k) accounts instead of stopping contributions. 401(k) loans are a fantastic deal if you are realistically capable of repaying them in a short timeframe. They're easy to get, and the interest you pay goes into your own account.
posted by deadweightloss at 6:45 PM on May 23, 2016 [2 favorites]

I'm not sure I understand this. You will be paying taxes on this income one way or another, either today or at retirement. Are taxes in your home country so high that they are higher for people in typical retirement tax brackets than taxes on you now, when it seems like you are earning enough to at least be in the 25% marginal tax bracket federally? Does your home country not impose tax on residents' sale of property abroad?

The investment that potentially doesn't make sense if you think you will be living in your home country in retirement is the Roth. If the country taxes foreign investment income, it may tax distributions from the Roth. So you will have paid relatively high U.S. taxes up front while still having to pay taxes on the gains--meaning no benefit to you at all (except sheltering money from judgments).
posted by praemunire at 7:57 PM on May 23, 2016

The important thing with 401(k) loans is that they must be paid back almost immediately if you leave the job (voluntarily or not). Failing to do some means you have to take the unpaid portion as income, paying tax on it plus the early withdrawal penalty.
posted by Candleman at 7:59 PM on May 23, 2016

Jumping to say emphatically that401k loans are not a fantastic deal, and should be avoided. They are essentially double-taxed: you pay taxes on the money when you take out the loan, and you pay it back with after-tax income. Plus, your money earns more in interest in the 401k account, so you're losing that opportunity by taking the loan- it's cheaper to get another low-interest loan.

I have no advice on the other matters.
posted by samthemander at 8:02 PM on May 23, 2016

With 401(k) loans, the money you take out is not taxed. It's just like any other loan as far as taxes.

your money earns more in interest in the 401k account

No necessarily, it depends on your investment options and their returns.

They are not always a good idea for buying a home, but they are perfectly viable for some people, particularly for young, high earners, as it's allows the person to maximize pre-tax savings.
posted by Candleman at 8:35 PM on May 23, 2016

I believe if you leave your job, any loans against your 401(k) will need to be paid back in a few months, and if you can't, you may be subject to penalties and taxes.
posted by willnot at 9:58 PM on May 23, 2016 [1 favorite]

As an aside, I work as an adviser. To have 150k saved as a couple at your age is phenomenal. I know people pushing 50 who have half that. That is impressive discipline.
posted by jtexman1 at 5:25 AM on May 24, 2016

If you don't retire in the US, then either a 401k or a house are just a pile of money. Maybe one grows faster, maybe the other grows faster. If people knew which, the better one would become more expensive until it wasn't better any more. One minor thing arguing for the 401k is that you can rebalance the risk profile of a 401k, or just point it at a fund that does it automagically, so that it gets more conservative as you age, while the volatility of the real estate market will be what it'll be.

tl;dr The question of where you're going to retire seems like a red herring to me and y'all should be making this decision along the same rent-versus-buy lines as anyone else in your market.
posted by ROU_Xenophobe at 6:48 AM on May 24, 2016 [1 favorite]

If you don't retire in the US, then either a 401k or a house are just a pile of money.

This is only true if they are taxed identically, and OP is right to be concerned that they might not be. I think OP needs to get tax advice from his own country so he has a basis for comparison.
posted by praemunire at 8:47 AM on May 24, 2016

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