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Have $100,000 burning a hole in your bank account? It may sound like an unlikely pipe dream, but windfalls happen: You sell a larger home to downsize; you find a buyer for your small business; a relative leaves you an inheritance. Or maybe you’ve simply over the years and are ready to put that savings to work.
For the purposes of this article, we’ll assume you’re already standing on solid financial ground: You have no revolving high-interest (credit card) debt, you’ve got an adequate cash cushion to cover any emergency expenses, you’re able to easily cover your monthly expenses and have any money you need for nearer-term expenses (home improvements, tuition, family vacations) set aside and not invested in the stock market.
Now, what's the best way to invest $100,000? Let's get to work.
» Want help investing? Jump off here to .
There are no two ways about it, $100,000 is a lot of money and deciding how to invest it can be equal parts exciting and overwhelming. Luckily, you needn't navigate this journey alone. Finding the right help depends on the type of advice you want, how much guidance you want, and how hands-on or hands-off you want to be:
Once you've determined what type of investor you are, time is of the essence to start putting that money to work in the market. A $100,000 windfall offers a unique opportunity to pad your savings — and beyond, maxing out your retirement account (more on that later).
Perhaps you’re thinking, “With this kind of money we can pay cash for the kids’ educations so they can graduate without any student loan debt!” Instead, consider this: In Maslow's hierarchy of needs for finances, “pay yourself first” forms the foundation of the triangle. Therefore, your needs come before. The kids can get scholarships or loans, or work their way through school; similar opportunities aren't available to retirees. (Learn more about .)
Investing, say, $70,000 of that windfall and earning a 6% average annual return will mean an extra $300,000 in 25 years — the kind of padding that makes it less likely you’ll run out of money and have to move in with the kids. Use a to see how extra dollars affect when you can retire and how much monthly income you’ll have in the future.
» Read up on the basics:
Don’t even think about the Cayman Islands. There are legal ways to dodge the IRS, at least for a while, and one of the best is to stuff as much of that $100,000 as possible into tax-favored retirement savings accounts.
Employer-sponsored retirement plans, such as a 401(k) or 403(b), and individual retirement accounts, such as Roth or traditional IRAs, can help shield tens of thousands of your dollars from taxes. (Learn more about the .)
With $100,000 at your disposal, you can afford to max out both a 401(k) and an IRA if you’re eligible. The 401(k) contribution limit is $19,500 for 2021 ($26,000 for those age 50 or older). Combine that with an IRA contribution limit of $6,000 in 2021 ($7,000 if age 50 or older) to invest as much you can for your future.
» Ready to max out? Consult our picks for best or accounts.
We've focused primarily on investing, but an equally important objective is to retain as much of that windfall as possible. A couple specific situations may require immediate action in order to avoid unwanted attention from the IRS:
Just as you don't want the IRS to come knocking for your money, don't lose it all to fees. Remember back before you were a one-hundred-thousandaire and you were vigilant about every little extra investing cost? You're probably considering new investments, so keep up that mentality because now there’s more money at stake.
Investing fees are like a distant relative you helped out one time who now hounds you for bigger handouts. Not only is every dollar you hand over money you’ll never recoup, but it’s also one less dollar you have to invest for your future. And a dollar that’s not invested has no chance to compound and grow.
Even a small extra fee can take a huge bite out of investment returns. We calculated that a millennial investor paying just 1% more in investment fees than her peer sacrifices nearly $600,000 in returns over time. The fix? Invest in low-cost mutual funds and exchange-traded funds as opposed to paying the higher price for actively managed funds or explore our picks for .
» Learn more:
Don’t scrap your existing asset allocation plan (that carefully crafted pie chart indicating how much of your money is in cash, bonds, stocks, real estate, etc.) in order to accommodate new money. Unless you’re in the midst of a major life change, such as retirement or liquidating assets for an upcoming expense, changes to the current makeup of your portfolio and your risk tolerance profile are probably unnecessary.
But with this new money in hand, now’s a good time to review where you are:
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