Here is a problem that most people would be happy to have: You suddenly find an extra $100,000 in discretionary cash on hand, and you're not sure what to do with it. The operative word here is discretionary. We're assuming that your $100,000 of extra cash really 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 your main priority for that chunk of change is to pay down your debt.
Once that is done, and if you already have some other assets in place—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.
Regardless, there is no one "best way" to use this cash as there are many options. If deciding what to do with $100,000 seems daunting and you become complacent, you could be missing out on rewarding opportunities. As with any other financial decision, your job 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 that you might not have considered or which you may want to reconsider.
- 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 the source of your money is from a retirement account, such as an IRA, explore tax-free rollovers into other qualified accounts.
- Taxable investments, such as stocks, bonds, mutual funds, and even CDs, are a good way to use your cash.
- Real estate can be a rewarding investment option, with its potential for appreciation and generous profits.
- For risk-averse people, investing in CDs and high-yielding savings accounts is a viable option.
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 can be complicated and requires that you do your due diligence.
Traditional Real Estate Investing
When most people think about investing in real estate, they think of purchasing and flipping properties or purchasing and renting out for income. Several factors contribute to whether gains would be realized quickly, over a long period, or even at all.
Location, location, location! A property's location is one of the most important determinants of a property's value. For the biggest bang for your buck, choosing the right location is just as, if not more, important than choosing the right property. And the condition of the market is perhaps the best indicator of whether traditional real estate investing is a good idea.
Real estate purchases typically command a significant outlay of capital. So, an investor should consider their return on investment (ROI), the property's profitability, and associated costs before investing. For example, consider how much of the $100,000 will be used towards the purchase, repairs, renovations, and marketing of the property. For flips, selling costs should be factored in, and for rentals, maintenance costs should be considered.
Real estate is one of the few assets that appreciate over time. As a result, some investors hold their properties until such appreciation is great enough to generate the desired profit. Such profits, when realized, are taxed as capital gains.
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 typically does not 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 its portfolio 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 REIT company. REITs pay their shareholders dividends, which are taxed as regular income; however, gains are taxed as capital gains.
You also can put your extra cash into taxable investments. The advantages are that when you decide to withdraw your money, it will be tax-free because the principal was taxed. However, earnings or capital gains will be considered taxable income.
Among the more common taxable investments are stocks, bonds, mutual funds, and exchange-traded funds (ETFs). Some of these instruments, like dividend-paying stocks, could generate periodic income. This approach might be attractive today as dividends and long-term capital gains receive favorable tax treatment compared to earned income and ordinary interest income.
However, if you are squeamish about investing in the market and want to be safe, you can invest in high-yielding certificates of deposit (CDs) or a high-interest savings account.
As of 2021, the best rates for high-yield savings accounts come from 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 even find some websites that will aggregate and compare the options for high-yield savings accounts for you.
Finally, if your retirement plan is an individual retirement account (IRA) or a 401(k), both of which are tax-deductible but not tax-free, you could look into opening a Roth IRA account as the money drawn during retirement from a Roth IRA is not taxed.
Converting to a Roth IRA is a taxable event, with the amount of the conversion 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. 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.
Taxpayers' adjusted gross income (AGI) must not exceed the limit for their tax filing status to be eligible. For instance, married couples filing jointly and widowed persons cannot contribute if their incomes are $214,000 or more. Married couples filing separately are ineligible if their income is $10,000 or more, and all others cannot contribute if their income is $144,000 or more.
Diversify, Diversify, Diversify
Although an amount of money is a relative concept, $100,000 is a respectable enough sum to be able to apply the Investing 101 mantra of diversification. In other words, you may divide up the $100,000, putting a portion of it into vehicles that you already own, like your IRA, and trying some new investment tools with the balance.
Deciding how to allocate this kind of extra capital involves weighing your options carefully, 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.
There are plenty of options for investing your $100,000, including building and managing a portfolio of investments. If you're a savvy investor, you might be able to go at it alone, picking your stocks, bonds, and other securities.
If you are a novice or average investor, perhaps 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 it 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 from a qualified retirement account, consider rollover or transfer options that defer taxation and offer features that match your financial goals.
How Can I Invest $100k to Make Passive Income?
There are plenty of investments that generate passive income. You could invest your $100,000 in real estate, 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 the income you desire.
How Can I Invest $100k to Make $1 Million?
It is possible to make $1 million from a $100,000 investment; however, it likely requires long-term investing. Some investments, however, 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.
What Real Estate Options Are Good to Invest $100k?
Real estate flipping, which involves purchasing, renovating, and later selling a property for profit, is the most common real-estate investment option. Real estate investors could alternatively rent out the property to generate monthly income while the property 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. The journey to find the right investment can be just as rewarding as the money invested.