Dear Marketplace Money staff,

I work for a company that provides a matching contribution toward my 401K retirement plan, which I just started to participate in. The employer match becomes vested (i.e. my money to keep) after 5 years. In addition to saving for retirement through the 401K, I am also trying to save for a future down payment on my first home purchase. I am finding it hard to save for both retirement and the down payment, but I have an idea that I think may solve the problem.

My question is: Since I can borrow against my 401K without penalty to purchase a home, doesn't it make more sense to designate a particular fund in my 401K (like a money market fund) to save for my down payment, instead of just using a comparable after-tax savings account outside of the 401K plan?

My logic is two-fold: First, by using the 401K as my way of accumulating the down payment instead of a savings account outside of the 401K, I would still get the benefit of my employer’s matching contribution. Even though the non-vested amount of my employer’s matching contribution is not eligible to borrow against, it is still ‘free’ money that will be earning interest toward my long-term retirement goals. And at the same time, I’m achieving my short-term goal of accumulating a down payment to purchase a home. The second part of my logic is: Unlike a regular savings account, my 401K contributions are tax-deductible, which also increases the benefit of using my 401K for the down payment.

Best regards,
Darrell