What Should I Do With $50,000 Coming Out of a CD Account?
By Barbara Friedberg August 10, 2015 CD Rates 101
Wondering what to do with $50,000 that just matured from your CD account? The decision can create opportunities and anxiety. As you run through the options — roll over the money into a new CD, invest it in stock and bond mutual funds, pay off debt, start a business, give some to your kids — you might have a hard time prioritizing the alternatives.
Read: What Is a High-Yield CD?
First, consider your overall financial plan and asset allocation. Review your entire portfolio and asset allocation before deciding what to do with $50,000 coming out of a CD. Then, make your reinvestment decision in accordance with your financial plan.
8 Smart Ways to Use $50,000
1. Pay Off Debt
The simple reason to pay off debt first is because the debt is costing you more money than you will earn from investment dividends and capital gains. A moderate credit card debt interest rate of 15 percent means you're still paying the equivalent of $1,500 per year on $10,000 of credit card debt. If you invested the $10,000, you might get an 8 percent return, or $800.
You're still losing money with this scenario. You paid $1,500 in credit card interest and only made $800 in investment returns, putting you at a $700 deficit. So, unless you can guarantee an investment return greater than your debt interest rate, you're better off paying off the debt.
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2. Put a Down Payment on a House or Rental Property
If you're considering buying a home or rental property, $50,000 is a solid full down payment. Real estate is one of the best ways to build wealth. There is potential for the property to appreciate, and your home can be a gold mine for tax benefits, from the mortgage deduction to property tax deductions and capital gains exclusion when you sell.
3. Ladder the $50,000 Into Several New CDs
If this $50,000 coming out of a CD is earmarked for the cash portion of your investment portfolio, then consider a strategy called laddering to prepare you to take advantage of higher returns when yields increase in the future, as they are expected to do.
Invest $10,000 in a one-year CD, $10,000 in a two-year CD, $10,000 in a three-year CD, $10,000 in a four-year CD and the final $10,000 in a five-year CD. When each CD matures, buy a higher-yielding, five-year CD.
Read: 5 Reasons to Build a CD Ladder
4. Give Money to Your Children
The IRS allows each individual to give $14,000 to any number of individuals each year without tax consequences. If you intend to leave an estate to your children, you might want to consider giving them some extra cash now.
In a Forbes.com article, Thomas and Robert Fross artfully addressed this question. Robert suggested that by making a gift during your lifetime, you can help your offspring when they need it the most. For example, giving an adult child money for a home down payment or help with a wedding will likely make a larger impact today than in 40 years when the adult child has fewer financial needs.
5. Increase Your Retirement Savings
As long as you don't foresee needing the funds until retirement, then maxing out your 401(k) and Roth IRA (if eligible) are wealth-building home runs. You can contribute up to $18,000 in your 401(k) for 2015 with an additional $6,000 if you're over 50. If you meet the income levels, you're able to stash an extra $5,500 in a Roth IRA or $6,500 if you're over 50.
Adding an extra $10,000 annually to your retirement account from age 40 to 45 and investing this money in a diversified portfolio of investments with an average 7.5 percent annual return will net you $220,015 at age 65.
6. Invest in a Low-Cost Diversified Stock Index Fund
If you can invest the $50,000 for at least five years, go for a low-cost, diversified mutual fund in line with your risk tolerance. For a one-stop diversified exchange-traded fund, the Vanguard Total World Stock ETF gives you exposure to the entire equity or stock market investing world. With a 2.33 percent yield, you have some cushion against the volatility of the fund.
Investing in the stock market offers juicy long-term returns, topping 8 percent to 10 percent. But don't forget that these average annual returns mask many poor return years as well.
A stock mutual fund is much riskier than a CD. Although the long-term trend of stock market investing is up, be aware that in the short term, stock market returns are volatile and go up and down.
Read: 5 Things to Know About College Savings Plans
7. Set Up a 529 Plan for Your Children or Grandchildren
College costs are increasing faster than inflation. If you think one or more of your kids or grandchildren will go to college, you might want to check out 529 plans, which help families invest money for future college costs.
Savingforcollege.com highlights some benefits:
Contributions in the account are not taxed and grow tax-free.
Your state might offer further tax benefits for contributions.
The donor controls the account, not the beneficiary. That way, you don't have to worry about Junior running off with the money.
There are no income, age or annual contribution limits.
8. Spend It
The previous suggestions assumed that you put the $50,000 into one type of investment. Neal Frankle, a Los Angeles certified financial planner and chief editor of WealthPilgrim.com, CreditPilgrim.com and MCMHA.org, suggested how you might parcel the funds into several opportunities.
"$50,000 is a lot of money, so think it through and don't rush into an investment decision," he said. "If you have any debt or don't have a large enough emergency fund, take care of those two things first. Next, consider how long it will be before you need the funds. If you can invest for five-plus years, consider longer-term investments such as equity funds or real estate."
Whether you break up the money from the $50,000 maturing CD or spend it all in one place, consider all of your options. Before doing anything, look at your overall financial circumstances. Consider your short- and long-term financial needs. After all, you don't want money tied up in the stock market that you'll need in three years to pay for Junior's college tuition.
Barbara A. Friedberg, MBA, MS, brings decades of finance and investing experience. She has a Bachelor of Science degree in economics from the University of Cincinnati, a Master of Science degree in administration and counseling from Miami University, and a Master of Business Administration degree in finance from Penn State University. Her work has been featured in U.S. News & World Report, Investopedia, Yahoo! Finance, GOBankingRates, InvestorPlace and many more publications.
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