Got $ 100,000 burning a hole in your bank account? It may sound like an unlikely pipe dream, but bargains do happen: you sell a bigger house to downsize; you find a buyer for your small business; a parent leaves you an inheritance. Or maybe you just have cropped on wealth creation over the years and are willing to put those savings to good use.

For the purposes of this article, we’ll assume that you already have a solid financial foundation: you don’t have high-interest revolving debt (credit card), you have enough cash cushion to cover emergency expenses, you can easily cover your monthly expenses and have the money you need for short-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.

Am I on the right track financially?

Our investment strategy roadmap can guide your investment journey.

1. Decide what type of investor you are

There are no two ways about it, $ 100,000 is a lot of money and deciding how to invest it can be both exciting and overwhelming. Fortunately, you don’t have to navigate this journey alone. Finding the right help depends on what kind of advice you want, how much advice you want, and how practical you want to be or not:

  • I am a DIY investor. If you’re the practical type, it’s cheaper – and easier – than ever to create, research, and manage your own portfolio. Before you start, decide which commercial style is best for you – active trading, day trading or passive investing. Once you’ve opened an account with one of the many brokerages online, you’ll be able to choose from a variety of assets (think: stocks, bonds, mutual funds, ETFs, and options). Check out our selections of the best stock brokers.

  • I would like to automate this process. Looking for a low cost / low hassle solution? Robo-advisers are a good option. These companies offer automated services Portfolio Management for less than you would pay a human to do the same. But many providers offer a human touch, where you’ll have access to financial advisers who can answer investment questions or customize your portfolio. We rounded the best robo-advisors, according to your needs.

  • I am looking for comprehensive advice. If you want someone to make investment recommendations, manage your windfall, and tackle other financial planning tasks on your list, you may want to consider hiring the next step of a robo-advisor, a financial advisor in line. These are cheaper than traditional financial advisers, but offer a similar level of service. Check out our list of best financial advisers.

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Once you’ve figured out what type of investor you are, time is running out to start putting that money to profit in the market. A $ 100,000 deal offers a unique opportunity to supplement your savings – and beyond, maximize your retirement account (more on that later).

You might be thinking, “With that kind of money, we can pay cash for the children’s education so they can graduate without any student loan debt!” Instead, consider this: In Maslow’s hierarchy of financial needs, “you pay first” is the foundation of the triangle. Therefore, your needs come before save for your child’s school fees. Children can get grants or loans, or continue their education; similar opportunities are not available for retirees. (Learn more about how to prioritize your financial goals.)

Investing in, say, $ 70,000 of that windfall and getting an average annual return of 6% will mean $ 300,000 more in 25 years – the kind of padding that will keep you from running out of cash and having to move in with the kids. Use a retirement calculator to see how the extra dollars affect when you can retire and how much monthly income you will have in the future.

3. Maximize your retirement (and avoid the IRS, while you’re at it)

Don’t even think of the Cayman Islands. There are legal ways to dodge the IRS, at least for a while, and one of the best is to put as much of that $ 100,000 as possible into tax-efficient retirement savings accounts.

Employer-sponsored retirement plans, such as 401 (k) or 403 (b), and individual retirement accounts, such as Roth or traditional IRAs, can help protect tens of thousands of tax dollars. (Learn more about the differences between IRAs and 401 (k) s.)

With $ 100,000 at your disposal, you can afford to maximize both a 401 (k) and an IRA if you are eligible. The 401 (k) contribution limit is $ 19,500 for 2020 and 2021 ($ 26,000 for people aged 50 or over). Combine that with an IRA contribution limit of $ 6,000 in 2020 and 2021 ($ 7,000 if 50 or older) to invest as much as you can for your future.

»Ready to maximize? Check out our picks for the best Roth IRA or IRA accounts.

We focused primarily on investing, but an equally important goal is to keep as much of this windfall as possible. A few specific situations may require immediate action in order to avoid unwanted IRS attention:

  • I wound up a 401 (k) when I quit a job. You only have 60 days after an employer writes you a check to get that money saved in a retirement account at work in a Roth IRA or traditional IRA. Otherwise, you’ll trigger a pretty hefty tax bill made up of income taxes (the IRS treats the money as earned income for the year) and a potential 10% early withdrawal penalty. Learn more about how to go from a 401 (k) to an IRA.

  • I inherited from an IRA: You may have a tight deadline if you’ve inherited an IRA. the rules on what recipients can and cannot do varies, as does the timeframe to take action without incurring penalties or triggering additional taxes. It all depends on your relationship with the deceased (surviving spouses have different options than other beneficiaries), whether or not the previous owner started receiving distributions before their death, and the type of IRA (Roth or traditional). ).

5. Stay vigilant about fees

Just like you don’t want the IRS to hit on your money, don’t waste everything on fees. Do you remember before you were a hundred thousand and you were vigilant about every little extra investment cost? You are probably considering new investments, so keep that mindset because now there is more money at stake.

Investment costs are like a distant relative you once helped and now suing you for bigger donations. Not only is every dollar you give money that you will never get back, but it’s also a dollar less that you need to invest for your future. And a dollar that is not invested has no chance of accumulating and growing.

Even a little extra can dramatically reduce returns on your investment. We have calculated that a millennial investor paying just 1% more in investment costs than their peers sacrifices almost $ 600,000 in return over time. The fix? Invest in low cost mutual funds and exchange traded funds rather than paying the higher price for actively managed funds or explore our choices for discount brokers.

6. Reallocate your wallet

Don’t abandon your existing asset allocation plan (that carefully crafted pie chart showing how much of your money is in cash, bonds, stocks, real estate, etc.) in order to accommodate new money. Unless you are in the midst of a major change in your life, such as retirement or liquidating assets for an upcoming expense, changes to your current portfolio composition and your risk tolerance profile are probably unnecessary.

But with this fresh money in hand, it’s a good time to review where you are at:

  • Take a snapshot of asset allocation. Look at the set mix of investments you have in all of your accounts, including current and former 401 (k), IRAs, taxable brokerage accounts, bank accounts, sock drawers, etc.

  • Identify areas where your portfolio has become imbalanced. Position sizes change over time as investments change. Rebalance your portfolio by using some of the outstanding money to restore underrepresented assets. This will reduce your exposure to the risk of lack of diversification.

  • Consider the asset location, too much. The location of assets also offers tax diversification. With your 401 (k) and in IRAs, you’ve covered the tax-deferred angle. Since you are not taxed on the growth of investments, it makes sense to own investments that generate taxable income (such as corporate bond funds, high growth stocks, or mutual funds that generate taxable income). buy and sell a lot) in these accounts. Even better if you can keep them in the Roth versions of these accounts, where withdrawals at retirement are tax free. In a taxable account, like a regular brokerage account, growth and interest are subject to annual income tax, so slow and steady investments (large cap stocks or index funds) have a place here.