#288: Ask Paula – How Should You Invest a $1 Million Lump Sum?
Karen and her wife are in their 50s, financially independent, and partially retired. They need $150,000 to buy a new home, and they aren’t sure which option is best. Should they take advantage of the CARES Act and pull money from their traditional IRAs? Raid their Roths? Or take out a mortgage?
Ingrid’s mom is retiring this year. To fund her retirement, she’ll sell her property for $1 million. How should she invest this money so that she can live off of it in perpetuity?
Elaine has saved $20,000 in a 529 plan for each of her two kids, but she realizes that they may not attend college. Should she keep the 529 plans, or save money elsewhere?
Amanda is afraid to tap the equity in her home and use it to purchase a rental property. How should she think through whether this move is right for her?
Lisa and her family plan to sell their home and move across the country. They might have the option to pay cash for a home, but they also want to buy an investment property. Should they get a mortgage on their new home or pay cash?
My friend and former financial planner Joe Saul-Sehy joins me to answer your questions on this episode. Enjoy!
Ingrid asks (at 2:10 minutes):
My mom is in her late 60s and she’s retiring this year. All of her assets are wrapped up in her property. Once sold, it will net her $1 million. What should she do with this lump sum of money? I know she can’t fund an IRA in one go, so should she use a taxable brokerage account? Should my mom use annuities? We don’t know where to start.
Karen asks (at 15:20 minutes):
I have a house-buying dilemma. We’re moving to a higher cost-of-living area, and we need $150,000 above the profit from our home sale to buy a new home. We’re not sure where to pull the $150,000 from. We don’t want to buy a less expensive home, rent, or stay put. We also don’t want to work more or harder than we have to.
Here are our details:
My wife and I are in our 50s, financially independent, and mostly retired. We have just over $1 million saved, we own our home, and we’re debt-free. We work enough to pay the bills, and until now, we’ve avoided withdrawing substantial amounts from savings and haven’t withdrawn anything from our retirement savings.
Most of our savings are in traditional IRAs, but we have about $100,000 in Roth accounts – 30 percent of which are contributions. We plan to convert the Roths when possible, but at this time, a good chunk of our savings is in cash.
Here are our options for coming up with the $150,000:
- Take advantage of the CARES Act and withdraw the money from our Traditional IRAs. Despite the no early withdrawal penalty and the option to pay taxes over three years, I estimate that we’d pay 28 percent between income taxes and repaying the ACA subsidy. This estimate is regardless of whether we claim the income all in one year or spread over three years. This is my top choice at the moment. Even though it’s costly, it leaves us where we are now: debt-free, in a home we love, and able to live comfortably off of our part-time work.
- Get a mortgage for $150,000, plus enough to cover about five years of payments. We can use cash from the house sale to make the repayments for five years. This will allow us to take advantage of the tax-free home sale income and maintain part-time work. After five years, we’ll be old enough to access our retirement accounts to pay off the mortgage. Even with low interest rates, the mortgage will cost about 15 percent if we keep it for five years. We’ll always have income, so I think we’ll pay nearly the same amount in taxes whether we withdraw from the traditional IRA now or later.
- Use our Roth savings and pay the 10 percent penalty on the 70 percent of it that is earnings. I don’t like the idea of paying a penalty on this tax-free money or wiping it out.
I know having a mortgage will allow us to keep more money invested, which could result in gains or earnings over the five years we’ll hold it, but I don’t want to bank on that. As lifetime savers, we’re just beginning to think about spending the money we’ve worked hard to save. It’s a psychological and financial challenge. I appreciate keeping things simple and don’t want to make a costly mistake. Help!
Elaine asks (at 42:17 minutes):
I have a question about 529 plans. I have two sons who are eight and 12 years old. I started contributing to their 529 plans a few years ago, and the balances are around $20,000 each.
As my kids grow, I realize that they might choose a different path that doesn’t include college. They do well in school and come from a highly educated family, but they’re also entrepreneurial and independent by nature.
Regardless of whether my kids choose to go to college, I want to save money to help them launch into adulthood. If there’s only a 50/50 chance my kids go to college, should I stash this money in a 529 plan?
I know there’s a penalty for withdrawing funds for things other than approved education expenses, but I’m not sure about the tax implications. I’ve heard that when done properly, the tax rate is based on the child’s tax bracket rather than the parents.
Even if that’s the case, I’m not sure how to think about the benefit of staying in the 529 plan versus saving somewhere else. I live in North Carolina where we don’t get a state tax break on contributions, so the value is primarily in the tax-free growth and having a completely separate account designated for my kids. What should I do?
Amanda asks (at 48:35 minutes):
I need help figuring out how to overcome my fear of tapping into my home’s equity to invest in our first rental property. I’m surrounded by a few people who say it’s a bad idea to risk your personal home for an investment. They say that it’s better to wait and save up the cash for the purchase. Is that true? If not, how can we look at our financial situation to figure out if this is the right move for us?
Here are our details:
I’m 39 and my husband is 51. We want to retire in 15 years, but we’re aiming for coast-FI (financial independence) before that. Ideally, only one or neither of us will work full-time, as we’d like to focus on our family. We think rental property investing is a great choice for us – we’re attracted to the monthly cash flow, and we’re both passionate and curious about real estate.
We have a net worth of $625,000: $110,000 is in a taxable brokerage account; $260,000 is in retirement accounts; $23,000 is in cash; and $225,000 is home equity. We recently refinanced our property, so we can’t do a cash-out refi. We’ve discussed taking out a home equity line of credit (HELOC), but we need to learn more about it.
Given our situation, how would you think about approaching a downpayment? What are the risks we should consider?
Lisa asks (at 1:01:48 minutes):
I have a question related to selling my personal residence.
I’m 40 years old and married with a young child. I’d like to take a mini-retirement in three years, and my ultimate goal is to retire early.
We owe $170,000 on our home, and it’s valued at around $570,000. My family is considering a cross-country move: one area has a lower cost of living than where we currently live, while the other area is about the same as our current area. If we move to the lower cost of living area, we could pay cash for a house. While it would be great to own a home outright, from what I understand, we wouldn’t get taxed on the capital gains from our home, so we don’t want to pass on that opportunity.
We’ve also thought about buying an investment property, so regardless of where we move, it might be a good idea to take out a mortgage since it’ll be easier to get a better rate on our primary residence versus an investment property.
We also have $45,000 that we’ve specifically saved to buy an investment property. Our emergency fund contains three to six months of living expenses, too.
How should I think about this decision? How much should I put down, and how much should I take out in a mortgage?
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