Best Way to Save for a House: Considering Taxes and Interest on Various Accounts

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You know you should be saving money for a down payment, but where should you be keeping it? Here is the best way to save for a house in our personal experience.

We’ve been on our journey of saving for our home down payment for a bit over a year now. While we had hoped to reach our goal in twelve months, we didn’t. But extending our timeline has fortuitously synchronized with all the other cogs that are turning in our day-to-day lives. So no tears.

During this time, I’ve thought a lot about the best ways to maximize our savings. This has been the best way to save for a house…for us. Feel free to pull from any of these techniques, or give a read over some that have not been the best match for us, but are still good ways to save.

Best Way to Save for a House: High-Yield Savings Accounts

Initially, we were keeping all of our savings in the dull savings account offered by our established financial institution. I was getting really frustrated with the interest rate, though. I shopped around, and found a high-yield savings account that quadrupled what I was earning before.

This has allowed our money to grow at an increased clip. Interest can feel like free money, but you should remember that sometime in January, your bank will be sending you a 1099-INT, which is a form you’ll need to file taxes. That’s right: you’ll have to pay taxes on the interest, but as long as that interest doesn’t bump you into the next tax bracket, it’s likely better to pay taxes on more money than to not pay taxes on no money. At least that’s the way it worked out for us.

Best Way to Save for a House: myRA

myRAs are meant to be retirement accounts. However, since they operate like Roth IRAs, you can pull your contributions out at anytime without a tax penalty. You just can’t touch the interest.

Why, oh why, would we want to put our money into a myRA if we can’t use the interest without penalty? Because of the tax savings. The myRA falls under the Savers Tax Credit, allowing you to deduct anywhere from 10%-50% of your contributions up to $2,000 if, as a married couple, you make under $61k. For us, that meant the tax savings was greater than the interest we’d gain by keeping it in our high-yield savings account. Plus, there’s the small bonus of the interest from the bonds. That we’ll keep for retirement.

You may be thinking that we should have just invested that money via a Roth IRA. We’d have much greater potential for higher gains. This is true, but we’d also have much greater potential for higher losses. This is a short-term savings goal of ours, and we don’t have 30 years to wait for the market to correct itself.

We were only able to take this deduction once instead of twice, because my husband is a full-time student and therefore ineligible. Another thing to take into consideration is that if your Roth IRA is currently your sole retirement vehicle, you may not want to take this route. You are only allowed to contribute $5,500 per year if you are under 50, and anything you contribute towards a myRA counts towards that limit. It doesn’t matter if you have two separate accounts. You, as a person, are limited to $5,500 total. Saving for a house shouldn’t cramp your retirement savings.

Best Way to Save for a House: Certificates of Deposit (CDs)

If saving for a home is more of a medium-term goal for you, you might want to look at CDs. When you open a CD, you give your money to a financial institution for x amount of years, and they promise to pay you an interest rate which is usually higher than anything you’d be able to find even with a high-yield savings account. You just can’t touch the money until x amount of years are over.

Interest rates used to be much higher prior to the recession, but in recent months they have started creeping back up, making this something worth looking at. (UPDATE: Since I wrote this post, the Fed announced that they will not be raising interest rates again for the time being. It will be interesting to see how and if this effects the slight rise we saw in interest rates on CDs during Q1 this year.)

We haven’t done this because we know we don’t want to have to wait a few years to purchase.

Twelve more months?

Hopefully we’ll be at our goal in the next twelve months. We had an income stream blow up and then implode like a supernova since we set this goal, and also found out that marriage made our tax return much smaller, causing further delay. I’m glad we had the goal, though, because it forced me to put more effort into my online endeavors which are now capable of supporting my family. (You can learn to do this, too.)

In all honesty, we could probably buy now with down payment assistance programs if we were willing to take on some PMI. It would even be the kind that eventually goes away. Unless the absolute perfect house comes along, though, we’re going to keep stashing away our pennies.

What we are happy with is the way the money we have been saving has been optimized. The high-yield savings account and myRA were great options for our situation.

Have you ever saved for a home? How did you optimize your savings?


16 thoughts on “Best Way to Save for a House: Considering Taxes and Interest on Various Accounts

  1. Hannah

    Not sure about in Pittsburgh, but here in Raleigh, one of the down payment assitance programs is a 0% loan. Since the note comes from the city and not from the bank, it allows people to avoid PMI although it raises payments. The program is pretty specific since it requires people to be first time buyers in certified distressed neighborhoods, but its an arm of a more well known program. It might be worth calling up the down payment assitance people just to double check that they don’t have something like that.

    PS- I hate debt even of the 0% variety, so obviously tread carefully.

    1. Femme

      Yes, I’m freaking out that we might owe over a hundred thousand dollars to someone else in a year’s time. Not that we couldn’t handle it, I just don’t like that feeling. Or interest.

      I do believe we have a similar program here in Pittsburgh. To be perfectly honest, I’m not interested in living in a distressed neighborhood. Our school district is great for kids who have very specific needs, but the general ed is pretty horrible. So we’re likely looking at the suburbs where those assistance programs are few and far between, though there is some down payment assistance through the state. Better to have 20% or buy in cash, but that option is there. Because most people can’t.

      Actually actively looking at alternatives. I don’t know exactly what that means yet, but I’d love to figure out a way to do this without a mortgage.

  2. Emily @ JohnJaneDoe

    I put money for several years in a mutual fund specifically to buy a house with. On the one hand, I got in the habit of saving and was regularly putting money away in an account I knew not to touch until I was ready. I eventually had enough to put down for a house.

    On the other, the performance of the fund was not so hot. I took a loss on the sale of the mutual fund. Not the best savings choice from a return point of view. A savings account might have been too big of a temptation, though, and timing the CDs would have been difficult as i didn’t really have a time line in mind until one day I just thought “Hey, I’ve got enough.”

    1. femmefrugality Post author

      Timing with CDs is rough. That’s the major reason we haven’t used them. And that’s exactly what I would be afraid of with mutual funds…short term losses!

  3. Alllan @ The Practical Saver

    This is a great post.

    I thought of investing money so I can use it later on when I’m ready to buy a house. However, I am not comfortable doing just that because there’s no guarantee in the stock market. Since buying a house is within a couple of years, I wouldn’t want to invest my money and take a hit when the market drowns. If I were to buy a house 10-15 years from now, sure, I would put my money in the stock market but right now my horizon is a short-term one.

    I think a high-yielding savings account is good. Instead of stashing your money is almost 0% interest account, might as well put your money to a better yielding account.

    1. femmefrugality Post author

      That’s exactly why I’m loving this myRA option so much….no chance to lose money on the investment unless the government fails. In that case, though, all of our FDIC insured bank accounts would probably be a bad place to hold money, too.

  4. Frank Facts

    A regular Roth IRA can work too! You can withdraw up to $10,000 without penalty, and since you’ve already paid taxes, it’s a good savings vehicle. I’m doing my taxes now, and am putting money in an IRA for a future home — not retirement!

    1. femmefrugality Post author

      It can, and because the myRA is technically treated like a Roth, the benefits are similar. The thing that concerns me with a Roth is that if you have a well-balanced portfolio, there is a chance for short term loss. Which isn’t a concern if you’re saving for retirement decades down the road, but it is a concern if you’re saving those specific dollars for a short-term goal, like homeownership. You won’t see the same gains as a Roth, but the myRA is guaranteed not to shrink.

  5. Andrew@LivingRichCheaply

    When we were saving for a place, most of the money was in high-yield savings accounts…unfortunately, interest rates are so low. Although it’s also good since mortgage rates are low. I was so tempted to invest it in the stock market but was nervous because of the volatility. I wouldn’t invest it if I planned on buying in a year. Online banks usually have better interest rates. Ally Bank has a no-penalty 11 month CD.

    1. femmefrugality Post author

      Interest rates are crazy low, and you’re so right…it’s a good thing when you’re borrowing, but not so great when you’re trying to save. The myRA removes that volatility, which is why we’ve chosen to put some of our money in there. We won’t be touching the minimal interest until retirement, but the tax savings of putting our money in that account is worth more than the interest we’d see in our high yield savings account, though we do still keep the bulk of our savings in there because at a certain point you cap out on the tax benefits. And, yes! All the best interest rates are online. That’s a great tip about Ally’s CD. Wish I had known about that sooner, as I think even 11 months may be risky for us at this point. We’re getting too close!

  6. Jen @ Frugal Millennial

    This is interesting and useful! My hubby and I are currently working on paying off our student loan debt in three years. Once the loans are gone, we’ll start saving for a house. I’ll definitely be saving this article for then!

  7. Mel @ brokeGIRLrich

    I’ve been thinking about this a lot recently! I have my down payment fund in a high interest savings account, but I’ve been thinking a lot about putting it into CDs. Medium term financial goals are really finicky to maximize interest on!

    1. Femme

      So true! Predicting when you’ll be ready when you know it’s not short term, but something you’re not willing to wait 30 years for, is tricky to strategize!

  8. Pingback: 15- vs. 30-Year Mortgage--Which is Best? | Femme Frugality

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