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- Here’s a problem that many would be glad to have: You’ve found an extra $100,000 in discretionary cash and aren’t sure how to use it. The keyword here is discretionary. We’re assuming this $100,000 is truly extra, meaning you have no outstanding debt, especially high-interest credit card debt.
- If you do have debt, most financial experts would recommend prioritising paying it down with this windfall.
- Once your debt is cleared, and if you already have other assets—such as a solid retirement plan, an adequate emergency fund, and some well-allocated capital—you’re in a strong financial position. If that’s the case, you likely already know some of your available options. However, if you’re new to investing, it may be a good idea to start with some research.
- There’s no one-size-fits-all solution for how to use this cash, as many options are available. Your goal is to select the investment vehicle—or combination of vehicles—that best suits your needs. Below are some of the top options for managing your cash windfall.
KEY TAKEAWAYS
- If you come into discretionary cash, the first step is to take care of the essentials: pay off debt, establish or continue funding a retirement plan, and set aside an emergency fund.
- If your funds come from a retirement account like an IRA, consider exploring tax-free rollovers into other qualified accounts.
- Investments like stocks, bonds, mutual funds, and CDs are excellent options for utilising cash.
- Real estate can be an exceptionally rewarding choice, providing the potential for substantial profits.
- For the risk-averse, CDs and high-yield savings accounts are solid alternatives.
- Important: Due to inflation, savings accounts and CDs now offer higher interest rates than in previous years. As of late 2022, rates above 3% can be found for savings accounts and short-term CDs. Be sure to compare offers to find the best rates.
Real Estate
Although it may not be the most exciting prospect, consider paying off your mortgage if you have one. If you do not own your home or another investment property, consider investing in real estate. Real estate can be a solid investment. However, it has risks and requires that you do your due diligence.
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Traditional Real Estate Investing
When most people think of investing in real estate, they often picture buying and flipping properties or renting them out for income. Several factors influence whether profits are realised quickly, over time, or at all.
First and foremost: location, location, location! The location of a property is one of the most vital factors in determining its value. To maximise your investment, selecting the right location is just as crucial as choosing the right property.
Market conditions play a key role in whether traditional real estate investing will be profitable. If property prices are volatile, it may be wise to wait for them to stabilise before making a move.
Real estate purchases generally require a large amount of capital. Investors should carefully evaluate their return on investment (ROI), the property’s potential profitability, and all related costs before committing. For example, consider how much of your $100,000 will be allocated to the property’s purchase, repairs, renovations, and marketing.
For flips, don’t forget to include selling costs. For rentals, be sure to account for ongoing maintenance costs.
Real estate is one of the few assets that typically appreciates over time. As a result, some investors choose to hold onto their properties until the value appreciates enough to generate the desired profit.
Real Estate Investment Fund (REIT)
If you’re looking to invest in real estate without the complexities of directly purchasing property, a Real Estate Investment Trust (REIT) could be a great choice. Investing is straightforward and doesn’t always require a large amount of capital. Some investment platforms allow you to invest with as little as $100.
Unlike traditional real estate investments that involve flipping and reselling properties, REITs hold properties in their portfolios that generate income. These properties can include retail spaces, medical facilities, residential properties, and commercial real estate such as office buildings.
You can buy REIT shares through a broker or directly from the company. REITs pay dividends to their shareholders, which are taxed as ordinary income. However, any gains from these investments are taxed as capital gains.
Taxable Investments
You can invest your extra cash into taxable investments, where your earnings or capital gains will be considered taxable income.
Common taxable investments include stocks, bonds, mutual funds, and exchange-traded funds (ETFs). Some of these, like dividend-paying stocks, may generate periodic income.
A tax policy that favours capital gains over earned and ordinary interest income makes this approach more appealing.
Low-Risk Investments
If you’re cautious about investing in the market and want to keep your money safe, consider investing in high-yielding certificates of deposit (CDs) or a high-interest savings account. The federal government insures your principal if the bank is FDIC-insured, which most banks are.
Don’t just settle for your local bank’s offerings. It’s important to shop around for the best rates. The most competitive rates for high-yield savings accounts are often available through online platforms of well-known financial services firms like Goldman Sachs, American Express, and Barclays Bank. You can also find attractive offers from out-of-state banks online.
Retirement Accounts
If your retirement plan is an Individual Retirement Account (IRA) or a 401(k), both of which are tax-deductible but not tax-free, consider opening a Roth IRA.
With a Roth IRA, you pay income tax on the amount you deposit in the year you contribute. However, you won’t owe any additional tax on the principal or investment gains when you withdraw the funds.
FAST FACT
Converting to a Roth IRA is taxable, with the conversion amount being reported as ordinary taxable income.
Not only do Roth IRA earnings grow tax-free, but the account is also exempt from the IRS-required minimum distribution, allowing funds to continue accumulating beyond retirement. Unlike traditional IRAs, there is no maximum age limit for participation.
Unless rolling over funds from an eligible retirement account, you cannot invest the entire $100,000 in a Roth IRA, as the IRS imposes annual contribution limits. For 2022, the maximum contribution is $6,000 or $7,000 for individuals aged 50 or older, with the limits increasing to $6,500 ($7,500 for those 50 or older) in 2023.
Additionally, the taxpayer’s adjusted gross income (AGI) must fall within the eligibility limits for a Roth IRA. Married couples filing jointly and widowed individuals are ineligible to contribute if their income reaches $214,000 or more, which rises to $228,000 in 2023.
Diversify, Diversify, Diversify
Your $100,000 is a substantial amount, making it an ideal opportunity to follow the Investing 101 principle of diversification. In other words, spread it out—allocate a portion to vehicles you already own, such as your IRA, and experiment with some new investment options for the remaining balance.
Deciding how to allocate this extra capital requires careful consideration of your options, taking into account both your short-term and long-term financial goals, as well as your risk tolerance.
As always, it’s wise to consult with a financial professional before making any investment decisions.
Additional Tips
There are numerous ways to invest your $100,000, including building and managing your portfolio. If you’re an experienced investor, you can select your stocks, bonds, and other securities independently.
However, if you’re a novice investor, working with a licensed financial advisor can be a smart choice. These professionals design investment strategies tailored to your financial goals. Besides offering recommendations, they can also manage where and how to invest your money.
Understanding how your money will be taxed is essential for safeguarding it and deciding where to invest. Different investments come with varying tax implications. If your $100,000 is tax-free, you should consider tax-efficient investments. If it originates from a qualified retirement account, explore rollover or transfer options that defer taxes while aligning with your financial objectives.
The Bottom Line
You have $100,000 and need to decide where to invest it. The first step is to thoroughly research your options to make an informed choice. Exercise due diligence to ensure your funds are allocated where they’ll achieve your desired outcomes. There are numerous options available, from real estate to managed portfolios. Finding the right investment can be just as rewarding as the returns on your money.
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