CNN Money’s Kate Ashford advised one very lucky lady from Honolulu today on how to invest a $25,000 windfall.
If you should be as fortunate as Anela Lani Grace Belegaud, whose mother gifted her the cash from her father’s life insurance, Ashord suggested contributing to everyone’s favourite retirement account: a Roth IRA.
A Roth IRA is ideal, since you won’t have to pay taxes on the cash when you start to withdraw after retirement. But you can only contribute $5,000 per year ($6,000 if you’re over 50).
Lucky for Belegaud, who is 50 and plans to marry next year, she and her future husband probably pull in enough income to support a Roth. Ashord writes:
“If you and your husband’s modified adjusted gross income is less than $169,000 in 2011, you can contribute up to $6,000 to a Roth ($5,000 plus $1,000 since you’re 50). Assuming you and your husband will be planning your retirement together, he could also put $5,000 of that money ($6,000 if he’s 50 or older) into a Roth in his own name. The amount you can each put away starts phasing out above that income, zeroing out at a modified AGI of $179,000.”
There are other ways to invest if you’ve fallen into a large pile of money and are weary of throwing it all in the stock market.
First thing’s first: Don’t tell anyone. That’s the advice Marcia Riner, a senior financial advisor with Edward Jones, gives her clients.
“People will come out of the woodworks,” she warns. “Your church, family, friends, people who say they’ve got this great investment for you.”
Hold onto your cash and proceed with caution. If it’s a considerable sum, you’re going to want to stretch it out to last the rest of your life, so don’t rush out to buy a new car or luxury home.
“Talk to a few professionals and put together a plan,” Riner adds.
Scott Holsopple of Smart401(k) says diversifying your investments is a crucial step to building your nest egg for retirement. Start thinking about investing in a target date or mutual fund, he says.
If you’re thinking about taking your chances on the stock market, it might be a better idea to put down a lump sum rather than letting the cash sit around while hedging your bets.
Bankrate cited a study by two financial researchers who tracked lump sum investing in the Standard & Poor’s 500 between 1926 and 2008. On average, the lump sum approach garnered a 12 per cent annual return, compared to 8 per cent return for dollar-cost averaging.
If you’re into that kind of money, the smartest first step would be to seek guidance from a financial advisor or at least a close mentor who can offer candid and honest guidance.
Before you stuff that fat check under your pillow, Click to here to see the best and worst places to stash your cash >