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LInative
LIF Adult
Member since 11/05 1977 total posts
Name:
Cassie
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Investing retirement $ into your house
Thoughts? The return on our home in 20-30 yrs will certainly beat anything we can invest in otherwise...(I think?) and we get to enjoy the investment in the meantime! We live in a midsize city in the south that hasn't seen as dramatic of a downturn in real estate. I'm curious what the negatives are other than risky real estate market which we're aware of.
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Posted 1/28/08 9:22 AM  |
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MrsBlueSash
Love my sailor
Member since 6/05 5793 total posts
Name:
Christian
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Re: Investing retirement $ into your house
It might make some sense if you plan to move to cheaper area or downsize after you sell and recoup your growth in equity. I definitely would diversify, and not have just your house as a retirement plan. I'm not sure I would do it, but that doesn't mean its not a good idea.
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| Posted 1/28/08 9:38 AM |
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anjerandunder
Positive thoughts worked!!!
Member since 6/06 1909 total posts
Name:
J
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Re: Investing retirement $ into your house
we've thought about it and if its in a retirement fund of some sort, the penalty of taking it out early plus the taxes you have to pay on it weren't worth it. that's why we decided against it.
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| Posted 1/28/08 9:38 AM |
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Kara
Now Zagat Rated!
Member since 3/07 13217 total posts
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They call me "Tater Salad"
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Re: Investing retirement $ into your house
No, it's not a good idea. Why?
In 30 years, assuming you have a 30-year mortgage, your mortgage will be paid off anyway.
Improvements to your home have no guaranteed return and you're likely to pay for them anyway - in addition to saving otherwise for retirement.
In 30 years, you'll still have housing expenses. The cost of a smaller home than you are living in now will be a lot more expensive than it is today. You may not have as much left over after downsizing as you think.
There are far better long-term savings plans than just your house. Don't fear the stock market, bond market, mutual funds, etc. over the long haul. They are generally very good investments if you have competent help investing.
I don't believe in putting all your eggs in one basket. You need to diversify your investments. Your house should only be one of your investments -- and IMHO, it shouldn't always be your biggest investment.
There are huge tax benefits to putting your money into tax-deferred retirement plans such as IRAs and 401(k)s. If your income qualifies you to invest in them now, Roth IRAs offer great tax incentives in retirement (though they use after-tax dollars now to invest). Roth 401(k)s are available through many employers and also offer great tax incentives in retirement -- with no income ceiling for investment.
I believe in investing heavily in your 401(k) and also having other investments that can become liquid after without penalty sooner than a 401(k) or IRA -- especially if you plan to retire early.
Quite frankly, your house is NOT enough alone for retirement.
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| Posted 1/28/08 9:47 AM |
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LInative
LIF Adult
Member since 11/05 1977 total posts
Name:
Cassie
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Re: Investing retirement $ into your house
Our accountant would deduct the IRA penalty from our taxes the following year comparable to loan origination fees. DH is self employed so this will help offset some of his income the following year.
I have a 401K and we have other investments too so we are diversified.
I should also mention that $20K in improvements that DH will do himself will give an immediate $50k return today. This is not our ONLY plan for retirement but I really do think it's a nice compliment to the overall picture!
Message edited 1/28/2008 9:56:49 AM.
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| Posted 1/28/08 9:53 AM |
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CookiePuss
Cake from Outer Space!
Member since 5/05 14021 total posts
Name:
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Re: Investing retirement $ into your house
Posted by LInative
Thoughts? The return on our home in 20-30 yrs will certainly beat anything we can invest in otherwise...(I think?) and we get to enjoy the investment in the meantime! We live in a midsize city in the south that hasn't seen as dramatic of a downturn in real estate. I'm curious what the negatives are other than risky real estate market which we're aware of.
Absolutely not a good idea. The previous poster mentioned many reasons why you don't invest your retirment dollars in your first home.
The return on real estate averages about 4% a year...that hardly keeps up with inflation and taxes. The ongong costs of a home are very high when compared with relative investment expenses in traditional investments.
Plus, when you retire, you will have to sell the home to access the the funds (reverse mortgages aren't always the best strategy) and you will still have to live somewhere so you will have replacement costs.
ETA: You are absolutely wrong about the return over 20-30 years. The stock market has averaged a return of over 11% for the past 20 years and that is net of expenses and includes all up and down markets. A first home can't compete with those returns.
Message edited 1/28/2008 11:03:53 AM.
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| Posted 1/28/08 10:21 AM |
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CookiePuss
Cake from Outer Space!
Member since 5/05 14021 total posts
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Re: Investing retirement $ into your house
Posted by LInative
Our accountant would deduct the IRA penalty from our taxes the following year comparable to loan origination fees. DH is self employed so this will help offset some of his income the following year.
I have a 401K and we have other investments too so we are diversified.
I should also mention that $20K in improvements that DH will do himself will give an immediate $50k return today. This is not our ONLY plan for retirement but I really do think it's a nice compliment to the overall picture!
You can't deduct IRA penelties for early withdrawals. Your accountant is 100% wrong. So, if it's an early withdrawl without the benefit of an exception - you are paying ordinary income tax and a 10% penelty...that can be upwards of a 45% penelty. If you DH wants to lower his taxable income, he should be putting funds in to his own retirement/KEOGH plan.
In addition, unless you turn around and sell your home after the 20k in improvements, you haven't had a return on your dollars at that point.
If you accountant is advising you to do this, I would seriously look for a second opinion.
Message edited 1/28/2008 12:21:56 PM.
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| Posted 1/28/08 10:25 AM |
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Blu-ize
Plan B is Now Plan A
Member since 7/05 32475 total posts
Name:
Susan
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Re: Investing retirement $ into your house
Posted by LInative
Our accountant would deduct the IRA penalty from our taxes the following year comparable to loan origination fees. DH is self employed so this will help offset some of his income the following year.
I have a 401K and we have other investments too so we are diversified.
I should also mention that $20K in improvements that DH will do himself will give an immediate $50k return today. This is not our ONLY plan for retirement but I really do think it's a nice compliment to the overall picture!
I'm sorry, but I have to agree with the PP..
The improvements that you put in today will most likely need to be upgraded again in 10-20 years. The improvements initially have a good value upon resale but as time goes on, they depreciate.
Are you talking about taking all of your retirement assets and putting them in your home? Are you planning on keeping your IRAs and 401(k) intact and then adding to your retirement funds by putting all your additional savings in your home?
True, having a home that is paid off is an asset, but it's nothing if you can't sell it.
Diversification is really key. Personally, I'm hoping to have at least the same in retirement accounts at the end of the day than my home is worth. I would be very afraid to put all my assets in one vehicle.
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| Posted 1/28/08 10:31 AM |
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Kara
Now Zagat Rated!
Member since 3/07 13217 total posts
Name:
They call me "Tater Salad"
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Re: Investing retirement $ into your house
Wait a minute -- are you talking about whether or not you should borrow against your retirement savings to put them into your home (or do an early withdrawal to invest in your home)?
I thought you were asking if you should use your house as your retirement vehicle.
I'm NOT a big fan of dipping into retirement savings to buy a house. I think you should be able to save separately for a down payment or improvements before you buy / do home improvements.
That said, my DH had a Roth IRA when we bought our house. We did do an early withdrawal to put it toward our house -- but only b/c there wasn't much money in there and he wasn't eligible to contribute to it any longer. We both also contribute the max to our 401(k)s. We didn't need the IRA, but quite frankly, we were making too much money to contribute to it, so we figured we should invest it into our home instead. There were some tax benefits to doing this as opposed to early withdrawal for another reason.
We'd never dip into our 401(k) savings, though.
If you are young AND contributing the max to 401(k), it might not be the worst idea in the world... but I really would think long and hard about borrowing against your retirement. Quite honestly, we neer dip into our savings -- we do have an emergency fund, but all of our other savings is there for a very specific reason and we don't dip into it until it's time to spend it on what it's been saved for. Our 401(k) savings is no exception. It's there for retirement. Period.
I'd have a good financial advisor run the numbers for you to show you the pros and cons of borrowing or withdrawing from your retirement savings to buy a house. Are you planning to use all of it? If so, think carefully... I'd not do that.
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| Posted 1/28/08 10:35 AM |
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BlueDiamonds
mommy to 3 boys
Member since 2/07 3885 total posts
Name:
proud mommy
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Re: Investing retirement $ into your house
Owning a home will definitely help in the long run when it comes times for retirement. And it's great that you are diversified. But for most people, the incentive from your employer these days to contribute to a 401K outweigh the benefits of anything else. It's like free money to invest in a 401K. Plus, if you think about what you will actually pay for your house over the long run (assuming a 30 year mortgage with TONS of interest), a home is not the BEST investment. And like someone else mentioned, updates to your home now will become old in 10-15 years.
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| Posted 1/28/08 12:14 PM |
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LInative
LIF Adult
Member since 11/05 1977 total posts
Name:
Cassie
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Re: Investing retirement $ into your house
We were originally considering early withdrawal of his IRA to invest in commercial property to grow his business (and as an obvious real estate investment). We're now considering it for adding living space to our home instead since DH can do most of the work himself - cost is mainly materials + minimal labor.
We are diversified in other areas and I am maxed on my 401K w/Co. match.
I should have restated the original question to ask about SOME of retirement savings being invested into our home. We will be in this house for 10+ years and the area is growing wildly. In the end, we have some money to play with (or not, depending on how you look at it) and for him doing the work himself the 10% penalty doesn't compare to the increased equity we'll have in the house. Ours is kind of a unique situation I think, I appreciate everyone's input.
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| Posted 1/28/08 12:25 PM |
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CookiePuss
Cake from Outer Space!
Member since 5/05 14021 total posts
Name:
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Re: Investing retirement $ into your house
Posted by LInative
We were originally considering early withdrawal of his IRA to invest in commercial property to grow his business (and as an obvious real estate investment). We're now considering it for adding living space to our home instead since DH can do most of the work himself - cost is mainly materials + minimal labor.
We are diversified in other areas and I am maxed on my 401K w/Co. match.
I should have restated the original question to ask about SOME of retirement savings being invested into our home. We will be in this house for 10+ years and the area is growing wildly. In the end, we have some money to play with (or not, depending on how you look at it) and for him doing the work himself the 10% penalty doesn't compare to the increased equity we'll have in the house. Ours is kind of a unique situation I think, I appreciate everyone's input.
From a professional standpoint, it still doesn't make sense.
Commerical property is completely different from residential property and how it is handled in the IRS code. That makes a big difference. You can't compare the two.
Secondly, your assumptions are very risky. You don't know that your area will continue to grow "wildly" or that you will have the luxury of maintaining the residence for 10+ years. Additionally, it's more then just the 10% penalty..you will be paying ordinary income tax on the withdrawal as well.
The upkeep costs of a first home tend to eat up any returns that would come from the investment. You are forgetting that you need to compute replacement costs, taxes, maintanence and upkeep in to the interal return numbers and they don't work out.
Are you maxing out all retirement options? 401k, KEOGH plan for your DH, IRAs, Roth IRAs, annuities? If you answered no to any of those questions, you shouldn't be looking at investing your retirement funds into your home. It isn't a good investment.
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| Posted 1/28/08 1:28 PM |
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Kara
Now Zagat Rated!
Member since 3/07 13217 total posts
Name:
They call me "Tater Salad"
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Re: Investing retirement $ into your house
What benefit you seek to gain from using your retirement money for this instead of waiting until you've saved enough of your other money.
I see none.
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| Posted 1/28/08 3:59 PM |
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