Where and How Should You Invest your Money?

Have $100,000 burning a hole in your bank account? Or perhaps you have just squirreled away a great deal of cash over time and are ready to put that savings to work.

Investing smaller windfalls, such as, for instance, a four-number tax refund or five-figure check from selling a midlife crisis car, deserve thoughtful consideration. But using a six-figure payday, the effects of the investing choices you make are amplified — for better (investment increase, future financial freedom) and worse (taking a tax hit, giving up gains to financial fees).

If you want to make your money grow, you have to invest it. Learn the fundamentals, how best to reach your targets, together with plans for investing specific sums, from small to large.

Now, let’s get to work on getting that $100,000 invested.

1. Prevent tripping an unnecessary tax bill

In many instances we’d say that you should not run into a decision with the cash. But there are a number of scenarios that could necessitate prompt action to be able to avoid unwanted attention from the IRS:

You’ve only 60 days after a company cuts you a check for money saved in a workplace retirement account to get that money into another retirement account, either a a traditional IRA or a Roth IRA.
Inheriting an IRA: In case you have inherited an IRA, you may also need to take action on a tight deadline. The rules about what beneficiaries can and cannot do and just how much time they have to do it without incurring penalties or tripping extra taxes depends on your relationship to the dead person (surviving spouses have different alternatives than other beneficiaries), whether or not the former owner had started choosing distributions before they died, and what type of IRA it’s (Roth or traditional).

2. Place as much cash as possible where the IRS can not get to it

Don’t even think about the Cayman Islands. There are legal means to dodge the IRS for a while, and among the greatest is to stuff as much of that $100,000 as possible into tax-favored retirement savings accounts.

And with $100,000 at your disposal, you can manage to max out both a 401(k) and an IRA if you’re eligible.

3. Pay yourself even more

Even after maxing out IRA and your workplace strategy, you have still got roughly $70,000 of that $100,000 to work with. Perhaps you are thinking, “With this form of money we can pay cash for the kids’ schooling so they can graduate without any student loan debt!”

Consider this before you go down that road: So, in the “save for retirement versus save for my kid’s school tuition” standoff, your needs come first.

The kids can get loans, scholarships or work their way through school. Retirees can not get loans or scholarships to cover rising health care costs and any emergency expenses that appear. Consider that in 2016 the typical monthly benefit for a retired couple who both receive Social Security benefits was $2, 212, according to the Social Security Administration.

Investing the leftover $70,000 windfall and bringing in a 6% average annual yield would mean an extra $300,000 in 25 years — the kind of padding that makes it less likely you’ll run out of cash and have to move in with the kids.
4. Do not let fees empty your fortune

Remember back before you were a one-hundred- thousandaire and you were alert about every small additional investing cost? Now there’s even more of your money at stake.

Investing fees are like a distant relative you helped out that one time who hounds you for bigger and larger handouts. Is every dollar you hand over cash you will never recoup, but it is also one less dollar you’ve got to invest for your future. Along with a dollar that’s not invested has no chance to compound and grow with all your other dollars.

The smallest additional fee can take a huge bite out of your investment yields. We calculated that a millennial investor paying only 1% more in investment fees than her peer sacrifices nearly $600,000 in yields over time. The fix?

5. Resist the urge to make a significant strategy shift

Changes to the present makeup of your portfolio as well as your risk tolerance profile are probably unneeded, unless you’re in the middle of a major life change, such as retirement or liquidating assets for an approaching expense.

But with this new money in hand a good time to review where you are:

Take an asset allocation photo. Look at the total mix of investments you’ve got in all your accounts, including present and old 401(k)s, IRAs, taxable brokerage accounts, bank accounts, the sock drawer, and so on.
Identify places wherever your portfolio may have become unbalanced. Standing sizes morph over time as investments contract and grow. Rebalancing your portfolio by using some of the windfall money to restore the assets that are underrepresented will lower your exposure to danger from dearth of diversification.
Consider asset location, also. About tax diversification, asset location is like asset allocation. With your 401(k) and in IRAs, you have got the tax-deferred angle covered. Since you are not taxed on investment increase, it seems sensible to hold investments that produce taxable income (such as corporate bond funds, high-growth stocks or mutual funds that buy and sell a lot) in these accounts. Even better if you’re able to hold them in Roth versions of these accounts, where withdrawals in retirement are tax free. In a taxable account, such as a regular brokerage account, growth and interest are subject to yearly income taxes, so investments that are slow, steady growers (large cap stocks or index funds and index ETFs) belong here.

6. Get the right type of help

Getting the right help is dependent upon the type of advice you would like, how much guidance you want, and how hands-on or hands-off you would like to be:

Full service help: Hiring a financial advisor (we recommend fee-only) will be the costliest choice. But you get a person manage your windfall and to make investment recommendations in addition to review and address other financial planning jobs on your list.
Do it yourself: In the event you are the hands on kind (or wish to learn the way to purchase stocks), it is more economical — and simpler — than ever to create, research and manage your own portfolio.
Automated or hybrid help: Robo-counselors offer automated portfolio management for less than you’d pay a person to do exactly the same thing. The price you pay is composed of investment fees (each fund or ETF’s expense ratio) and whatever management fees the robo-advisor charges. In the event the low-cost/low-hassle set up of a robo-managed investment account seems good but you crave the human touch, too, Vanguard and Personal Capital offer both in one bundle. What you get for your money is access to financial advisors f

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