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Written by Kevin Mercadante on January 23, 2022
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How To Invest While Saving Up For A House

One of the most important elements of successful investing is doing it consistently. Since it takes many years to build a large portfolio, especially for retirement, contributions must be made on a regular basis. That means continuing to invest even while saving up for a house.

With the median price of a house nationwide exceeding $400,000, continuing to invest while saving up for a house is no easy task! Given that the minimum down payment required is typically between 3% and 5% of the purchase price, that can mean saving between $12,000 and $20,000 just to purchase an average house.

The down payment requirement will be even higher in high-priced markets, or if you want to put down a larger amount to lower your monthly payment.

So, how can you invest while saving up for a house? Let’s investigate the possibilities.

Why it’s Important to Invest While Saving Up for a House

Though there may be a temptation to completely suspend investment contributions while you’re concentrating on saving for a house, there are plenty of concrete reasons why that’s a bad strategy.

First, a down payment on a house can be anywhere from $10,000-$100,000 or more. For the average household, it’ll take years to save that kind of money.

If you fully commit to saving money for the down payment – at the expense of investment contributions – you may get your house more quickly, but you may also be compromising your future.

Nowhere is this more important than with investing for retirement. Time matters where retirement savings are concerned. That’s because the sooner you begin saving for retirement, the earlier you’ll be able to retire.

It all revolves around the time value of money. The more time your money has to accumulate investment gains, the faster your portfolio will grow.

This will be especially important if you hope to retire early. But it can also be a critical factor if you want to get the bulk of your retirement savings covered early in life, so you won’t have to work so hard at it later.

What Pausing Retirement Contributions Can Do to Your Retirement Portfolio

Let’s work an example to demonstrate the point, making the following assumptions:

  • Your current age: 30
  • Expected age at retirement: 65
  • Current retirement plan: Employer-sponsored 401(k) plan
  • Current 401(k) plan balance: $50,000
  • Your annual income: $100,000
  • Annual contributions: 10% of your income, or $10,000
  • Average annual rate of return: 8%, on a portfolio invested primarily in stocks

Based on the assumptions above, your 401(k) plan balance will grow to $2,536,221 by the time you turn 65.

Now let’s assume you decide to pause your retirement contributions for five years. During that time, you plan to save $50,000 for the down payment on a home. You already have $50,000 sitting in your 401(k) plan, but no contributions will be made until you turn 35.

How much will you have saved for retirement at 65, after putting your retirement contributions on hold for five years?


 Shocking, isn’t it? By suspending your retirement contributions for just five years, you’ll give up $615,618 in your 401(k) plan by the time you turn 65.

In truth, it’s likely you’ll give up a lot more than that. We used a simplified calculation assuming that your income remains stuck at $100,000 each year, which is highly unlikely. We’ve also excluded any potential matching contributions from your employer.

If we included just those two factors into the mix, it’s very likely the net loss for the suspension of retirement contributions would cost well over $1 million.

It’s hard to justify redirecting $50,000 in the next few years at a potential cost of over $1 million.

But that’s not the only cost.

retirement earnings

The Tax Cost of Suspending Retirement Plan Contributions

The $10,000 you’ll be contributing to your retirement plan each year is tax deductible. A similar contribution to saving for a house isn’t.

If you’re in a combined federal and state marginal income tax rate of 30%, you’ll be giving up $3,000 per year in tax savings by halting your retirement contributions ($10,000 X 30%).

Over five years, the cumulative cost in income tax alone will be $15,000.

Put another way, you’ll be paying $15,000 in higher taxes for the $50,000, you’ll be saving for the purchase of a home.

 That’s not a trade-off worth making.

Finding a Middle Ground

So far we’ve crunched a few numbers that make it clear suspending your retirement contributions is a costly way to raise money for the down payment on a house.

But in the real world, where most people live, retirement plan contributions are often the single largest source of savings. While it’s important to continue making retirement contributions, it’ll be less damaging to simply reduce the amount you contribute, rather than stopping contributions altogether.

There are couple of workarounds:

Make the minimum retirement contribution to get the maximum employer match. If your employer matches 50% of your contributions up to 6% – or 3% – plan to continue contributing at least 6% of your pay. That will ensure you get the maximum employer matching contribution. It won’t eliminate the long-term costs and tax consequences we discussed earlier, but it will minimize them.

Take a loan against your 401(k) for the down payment on your house. Under current IRS rules, you can borrow up to 50% of the vested value of your employer-sponsored retirement plan, up to a maximum of $50,000. Even if that doesn’t cover your entire down payment, it should make a big contribution.

If you go this route, be aware that it’s not a cost-free option. Yes, you will be able to continue making full contributions to your retirement plan. And yes, you will get the full benefit of your employer’s matching contribution.

But the cost of taking a 401(k) loan will be in the form of a reduced rate of return. That’s because the return on the borrowed portion of your retirement plan will only earn the amount of interest you’re paying on the loan. If that’s 4%, and you normally average 8% in investment returns, you’ll be cutting your returns in half on the outstanding loan balance

Liquidating Non-retirement Investments

While there are costs associated with liquidating non-retirement investments to purchase a house, they’re not nearly as high as they are with retirement savings. In addition, non-retirement investments are often held specifically for major purchases, with a house being a primary example.

You can also think of it as swapping out one investment for another. For example, while your current non-retirement investment portfolio may be invested in stocks and bonds, you’ll be liquidating funds to move the money into another investment – your new home.

Given that residential real estate has a long history of rising in value, the long-term trade-offs aren’t nearly as extreme as they are with a retirement plan.

That said, there are costs involved in liquidating taxable investment accounts.

The Capital Gains Tax Consequences

If you sell appreciated investments in your portfolio, it’s likely you’ll owe capital gains tax. Depending on how many investment positions you sell, it may be difficult to calculate how much that tax will be.

It may be possible to minimize capital gains taxes by first selling investment positions that have lost money. Not only will no tax liability come from selling losing positions, but you may also get the benefit of a capital gains loss deduction for those sales.

Failing that, sell positions that represent long-term capital gains. Those are securities that you’ve held for more than one year and sell for a profit. The IRS provides for reduced tax rates on long-term capital gains.

For example, if you’re married filing jointly, and you have less than $83,350 in taxable income in 2022, the long-term capital gains rate is zero. Regular income, including short-term capital gains, will be subject to a tax rate of 10% or 12%.

If your taxable income exceeds $83,350, but is less than $517,200, the long-term capital gains rate is limited to 15% of the profit. Regular income, including short-term capital gains, will be subject to a tax rate of between 22% and 35%.

If your taxable income is greater than $517,200, the long-term capital gains rate is limited to 20% of the profit. Regular income, including short-term capital gains, will be subject to a tax rate of 35% or more.

Taxable Investment Liquidation Priority

To summarize, if you’re going to liquidate taxable investments to purchase a home, do so in the following order:

  1. Sell losing investments first, both to avoid creating a tax liability, and to gain a potential tax write-off.
  2. If you don’t have enough losses for the money you need to raise, sell profitable investments that you’ve held for more than one year. You’ll get the benefit of the lower long-term capital gains tax rate, which could even be zero.
  3. Sell short-term investments with gains, but only if there’s no other way. Then make sure you have the money to cover the additional income tax liability.

Should the Money You’re Saving for a House be Invested?

Speaking of taxable investments, should you invest the money you’re saving for a house to take advantage of investment gains?

It might be worth considering if you’re not planning to buy a house for at least 10 years. That will give you a long enough time horizon to recover any short-term losses while you’re investing.

But if you plan to buy a house in no more than a few years, investing in anything with risk is not recommended.

For example, let’s say you plan to buy a house in three years. To reduce the amount of money you’ll need to save, you decide to invest in an aggressive mutual fund that’s recently been providing returns of 15%+.

It sounds like a good strategy on the surface. But what happens if during one of the three years you’re investing money your expected 15% gain turns into a 50% loss?

Investing is a long-term game in large part so you’ll have time to recover such losses. But if you have a definite need to save money within no more than a few years, risk investments are best avoided.

Instead, hold your money in super-safe, interest-bearing savings accounts. You may not get big returns, but you’ll always know exactly how much money you have, and how much you’ll have available when the time to buy a house comes around.

Strategies to Minimize Your Down Payment Amount

One of the best ways to save for a house is to minimize the down payment with the mortgage.

For example, the minimum down payment requirements for the three most popular mortgage programs are as follows:

  • Conventional mortgages: 3% to 5%
  • FHA mortgages: 3.5%
  • VA mortgages: 0%

Those are the down payment requirements that will apply to mortgages that don’t exceed $548,250 for 2021. (However, higher loan limits are permitted on 2-to-4 family homes, and in areas of the country designated as high cost.)

By minimizing the down payment required, you’ll also reduce the amount you need to save to buy the house, often dramatically.

For example, if you plan to purchase a house for $500,000 with a 20% down payment, you’ll need to save $100,000. But if you purchased the house with a conventional mortgage using the minimum down payment of 5%, you’ll only need to save $25,000.

Minimum Down Payment a Good Strategy – But Not Cost-free

Now, this is a good point to stop and warn that – like the other strategies in this guide – there is a cost that comes with this recommendation.

First and foremost, your monthly mortgage payment will be higher on a $475,000 mortgage than it will be for a $400,000 mortgage.

There’s also the private mortgage insurance factor.

Both FHA and VA loans require mortgage insurance. FHA loans require both an upfront premium, which is typically added to the loan amount, as well as a monthly premium that’s added to your mortgage payment. VA loans require only an upfront premium that’s added to your loan amount.

On the other hand, conventional loans require private mortgage insurance only when you make a down payment of less than 20% of the purchase price.

Unfortunately, private mortgage insurance, or PMI, is not cheap. For example, if a 5% down payment requires a $475,000 mortgage, PMI will add about $309 to your monthly house payment. That assumes a credit score of at least 700. If your score is lower, the premium payment will be even higher.

There’s also what we might think of as a soft cost. By choosing a mortgage with a smaller down payment requirement, you will be able to buy with less money up front. But the trade-off is that you’ll be carrying a much larger amount of debt on your home.

The lack of substantial equity could make it difficult to sell your house on short notice. But it will also make it harder to pay your mortgage off early, if that’s your intention.

There are trade-offs, to be sure. But it will eliminate the need to save tens of thousands of dollars, or to reduce contributions to your retirement plan.

Bottom Line

As you can see, there’s no truly cost-free way to save up for a house. But there are ways to minimize the impact, especially on your investments.

That’s important, because while you may need a house, investing – especially for retirement – is at least as important.

The trick is to balance the two, saving for a house while continuing to contribute to your retirement plan.

We’ve given you some options, so choose the one that will work for you, or a combination of two or more. It’s not at all impossible to continue to invest while saving up for a house.

Article written by Kevin Mercadante
Kevin Mercadante is a freelance professional web content writer for hire, and the owner of his own personal finance blog, He has extensive backgrounds in both accounting and the mortgage industry. In fact, it was his career crash-and-burn from the mortgage business in 2008 that led him into blogging and freelance professional web content writing. Kevin and his family live in New Hampshire, after long stints in New Jersey and Georgia.

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