This is the kind of problem most people would be very happy to have: a double-income household, without debt and an extra $100,000 in tax-free cash on hand.

But, as in all financial matters, there are effective and ineffective ways to deal with this type of situation. To begin with, the problem is much the same as any other sort of financial concern — choosing the option that is right for you among a variety. With that kind of extra cash, you are looking at several great options. This is especially true if you already have a viable retirement plan, a good emergency fund set aside and some other capital already well placed in an investment portfolio. (Read about smart ways to invest extra cash.)

Real Estate

Although perhaps not the most exciting prospect, before looking into further investment opportunities, consider paying off your mortgage. Even if you don’t own your home, think about investing in real estate. Real estate is a solid investment. This is particularly the case when it comes to investing your available cash as interest rates are at present very low.

John H. Robinson, a financial advisor with Financial Planning Hawaii in Honolulu, suggests paying off your mortgage first for this very reason. “Since we are in an environment where yields on fixed-income investments (e.g., CDs, bonds, etc.) are near historic lows, using your cash to pay off some or all of your mortgage is not necessarily an outlandish recommendation.”

Taxable Investments

Alternatively, you can allocate your extra cash in taxable investments. This is a good idea because once you decide to withdraw your money from a taxable investment account, whether it is for a big purchase or at retirement, this money will be tax-free. Jeff Rose, a financial advisor with Good Financial Cents in Carbondale, Illinois, explains, “The plan of putting [the money] into taxable investments is a solid one ... When you retire, most tax-sheltered plans will be taxable when you withdraw the money. They’re tax-deferred, not tax-free. When you withdraw from a taxable account, the withdrawals are tax-free, since the tax has already been paid on them.”

Robinson suggests dividend stocks. “Consider rising dividend stocks for your taxable investment account. In a low-interest rate world, investing in shares of U.S. companies that pay qualifying dividends can be a neat way to begin building a future retirement income stream. This approach may be particularly attractive today, since dividends and long-term capital gains receive favorable tax treatment relative to earned income and ordinary interest income.”

If your pension plan is an IRA or 401(k), both of which are tax deductible but not tax-free, you could look into opening a Roth IRA account. The money drawn during retirement from a Roth IRA account is tax-free. “Think of this as a form of retirement tax diversification, in which you have a mix of both taxable and tax-free retirement income sources,” Rose says.

The Bottom Line

Deciding how to allocate this kind of extra capital involves making the right financial decisions for you. These include weighing your options carefully, considering the balance of your short and long-term financial goals and being realistic about your own risk tolerance. There may also be a temptation to be more aggressive with this kind of "extra" money, especially if you are only in your 40s and have time to recoup from losses, which is why it is a good idea to seek the advice of financial professionals.

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