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Here is a problem that most people would be happy to have: You find an extra $100,000 in discretionary cash and are unsure what to do with it. The operative word here is discretionary. We’re assuming that your $100,000 of extra cash is extra and that you do not have any outstanding debt, especially high-interest credit card debt.
If you have outstanding debt, most finance professionals would say that paying down your debt should be your priority for that chunk of change.
Once that is done, and if you already have other assets—such as a viable retirement plan, an adequate emergency fund, and some other well-placed capital—you’re already ahead of the game. If so, you probably already know what some of your options are. However, if you are new to investing, you may want to start with some research.
There is no best way to use this cash, as many options exist. Your goal is to choose the investment vehicle—or combination of vehicles—that is right for you. Cited below are some of the best options for your cash windfall.
KEY TAKEAWAYS
- If you find yourself with so-called discretionary cash, first take care of the basics: pay off debt, set up or continue funding a retirement plan, and set aside an emergency fund.
- If your money comes from a retirement account such as an IRA, explore tax-free rollovers into other qualified accounts.
- Investments such as stocks, bonds, mutual funds, and CDs are a good way to use cash.
- Real estate can be a rewarding option, with a potential for generous profits.
- For the risk-averse, CDs and high-yielding savings accounts are viable options.
Important: Due to inflation, savings accounts and CDs pay better interest rates than in years. As of late 2022, rates above 3% can be found for savings accounts and short-term CDs. Compare offers for 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 about investing in real estate, they think of purchasing and flipping properties or renting out for income. Several factors contribute to whether gains would be realized quickly, over a long period, or even at all.
First: location, location, location! A property’s location is one of its most important value determinants. For the biggest bang for your buck, choosing the right location is just as important as choosing the right property.
The market condition best indicates whether traditional real estate investing is profitable. If prices are volatile, it might be a good time to wait for them to settle.
Real estate purchases command a significant outlay of capital. Investors should consider their return on investment (ROI), the property’s profitability, and the associated costs before investing. Consider how much of your $100,000 will be used towards the property’s purchase, repairs, renovations, and marketing.
For flips, selling costs should be factored in. Maintenance costs must be considered for rentals.
Real estate is one of the few assets that appreciates over time. As a result, some investors hold their properties until the appreciation is large enough to generate the desired profit.
Real Estate Investment Fund (REIT)
If you want to invest in real estate without the complexities associated with directly purchasing property, a real estate investment trust (REIT) could be a great option. Investing is simple and does not necessarily require a lot of money. Some investment platforms allow investments as low as $100.
Unlike traditional real estate investments that are flipped and resold, REITs have properties in their portfolios that generate income. They include retail spaces, medical facilities, residential properties, and commercial properties such as office buildings.
You can purchase REIT shares through a broker or directly from the company. REITs pay their shareholders dividends, taxed as regular income; however, gains are taxed as capital gains.
Taxable Investments
You can put your extra cash into taxable investments. That is, 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 instruments, like dividend-paying stocks, could generate periodic income.
A tax policy that treats capital gains favorably compared to earned and ordinary interest income makes this approach more attractive.
Low-Risk Investments
If you are squeamish about investing in the market and want your money to be safe, you can invest in high-yielding certificates of deposit (CDs) or a high-interest savings account. The federal government even insures your principal if it is an FDIC member (as almost all banks are).
Don’t just drop by your local bank branch. You should shop around for the best bank rates. The best rates for high-yield savings accounts may be offered by the online platforms of various financial services firms whose names you might already know—such as Goldman Sachs, American Express, and Barclays Bank. You can also find out-of-state banks with competitive offers online.
Retirement Accounts
If your retirement plan is an individual retirement account (IRA) or a 401(k), both tax-deductible but not tax-free, consider opening a Roth IRA account.
With a Roth account, you pay the income tax due in the year you deposit the money but owe no further tax on the principal or investment gains when you withdraw the money.
FAST FACT
Converting to a Roth IRA is taxable, with the conversion amount reported as ordinary taxable income.
Not only can Roth earnings grow tax-free, but the account is not subject to the IRS-required minimum distribution, allowing funds to accumulate past retirement.6 Unlike traditional IRAs, there is no maximum age limit to participate.
Unless rolling over from an eligible retirement account, investing the entire $100,000 would not be possible because the IRS limits how much you can contribute to a Roth annually. For 2022, the maximum contribution is $6,000 or $7,000 for individuals age 50 or older, rising to $6,500 ($7,500 for those age 50 or older) in 2023.
Also, the taxpayer’s adjusted gross income (AGI) must not exceed the limit for Roth eligibility. Married couples filing jointly and widowed persons cannot contribute if their incomes are $214,000 or more, rising to $228,000 in 2023.
Diversify, Diversify, Diversify
Your $100,000 is a respectable enough sum to apply the Investing 101 mantra of diversification. In other words, divide it up, putting a portion of it into vehicles you already own, like your IRA, and try some new investment tools with the balance.
Deciding how to allocate this extra capital involves carefully weighing your options, considering your short—and long-term financial goals, and being realistic about your risk tolerance.
As always, it is a good idea to seek the advice of a financial professional before investing.
Additional Tips
There are plenty of options for investing your $100,000, including building and managing a portfolio. You can pick your stocks, bonds, and other securities alone if you’re a savvy investor.
If you are a novice investor, enlisting the services of a licensed financial advisor makes sense. These professionals create investment solutions that help you achieve your financial goals. In addition to making recommendations, they can also manage how and where to invest your money.
Understanding how your money will be taxed is crucial for protecting and determining where you should put it, as different investments produce different tax situations. If your $100,000 is tax-free, you’ll want to consider tax-efficient investments. If the source of your $100,000 is a qualified retirement account, consider rollover or transfer options that defer taxation and offer features that match your financial goals.
FAQs
1. How Can I Invest $100k to Make Passive Income?
Ans: You could invest $100,000 in real estate, investment trusts (REITs), stocks, or other securities. Thoroughly research your options and speak with a professional, such as a broker or investment advisor, to help you choose the investment that will generate your desired income.
2. How Can I Invest $100k to Make $1 Million?
Ans: Making $1 million from a $100,000 investment is possible, but long-term investment is likely required. Some investments have generated monstrous returns quickly, but they are extremely risky. Financial advisors can help you choose what best suits your needs and aligns with your goals.
3. What Real Estate Options Are Good to Invest $100k?
Ans: Real estate flipping, which involves purchasing, renovating, and later selling a property for profit, is one common real estate investment option. Real estate investors can also rent the property to generate monthly income while the property’s value appreciates.
However, purchasing real estate requires a large amount of cash. Another option is to invest in a real estate investment trust (REIT), which invests in income-producing real estate and requires less capital.
The Bottom Line
You have $100,000 and need to know where to invest it. The recommended first step is to research your options to make an informed decision. Exercise due diligence so that your funds land where you want them to. There are plenty of options available, from real estate to managed portfolios. Finding the right investment can be just as rewarding as the money invested.
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