<p>I am going try to take advantage of all the financial gurus on this site and ask for some advice regarding a recent inheritance of $200,000.</p>
<p>We are a modest income family with no debt other than our house (plan to have paid off in 6 years) and a few grand on vehicles (0% interest). </p>
<p>Many have advised us to pay off the house immediately, but with a 3.3% mortgage interest rate, it seems to me we’d be better off investing the money because the investment gains will likely (although not guaranteed) exceed that over time.</p>
<p>Our oldest will start college in 9 years with our second following the next year. DH is in a high stress job (both physically and mentally) and will likely hope to retire early (we started our family late, so kids will be in high school when this happens). I am a teacher, so I have a state pension coming - but I love my job, so I’ll likely work a lot longer.</p>
<p>My current thought was to invest the money with Vanguard (or similar, somewhere with minimal fees) and put the yearly gains into our IRAs. I realize we’d have to pay taxes on the gains before putting them into our Roths, but this would probably keep the principal investment around $200,000 while sheltering the gains for financial aid purposes. With even state school COA projected around $35,000 by the time our kids graduate, we may need that $200,000 to pay for our kids’ school if they don’t end up going private.</p>
<p>Absolutely the best option would be Roth IRAs. Assuming you have 401-Ks with an employer match that has been maxed. I would do that even if you have to dip into the principle. You can each put $5,000 per year for the next nine years which would then be sheltered for financial aid purposes. </p>
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Assuming that at that low rate and small mortgage, that you itemize. Even then, it’s a good rate and if you can earn more than that, do that.</p>
<p>Forgot to mention that we do have 529 plans for each kid - about $20,000 in each one so far. We currently add around $1200/year to each one out of paychecks. I considered adding more cash to the 529s; still thinking about that one. </p>
<p>I teach, and DH owns a small business - so no 401K plans. I’ll get roughly 50% of my highest average salary for the rest of my life when I retire. We also have the IRAs, but no other retirement assets currently. </p>
<p>How much is in your IRAs? You could convert your current IRAs to Roth IRAs and use the inheritance to pay the taxes. If you time this right with your husband’s retirement (and subsequent drop in income) and when kid #1 will need to fill out the FAFSA, you would minimize the tax hit and remove assets from being counted for FA at the same time.</p>
<p>Does your H have a SEP-IRA through his business? You could use the inheritance to fund it, you can generally put a lot more in than an individual IRA.</p>
<p>Or he could open a Solo 401k, that lets you put even more money away for retirement.</p>
<p>I would recommend funding 50-60% of your projected total COE for both kids into the 529 plans for your kids now. That makes any gains between now and when you spend the money on college non-taxable. You don’t want to overshoot, but there’s no reason not to max out that tax benefit. Then the after-tax income you would ordinarily have been putting into the 529s from your paychecks in the next 9 years can go into Roth IRAs instead. </p>
<p>I’m a fan of Vanguard funds. Unlike some, I consider the likelihood that I will outsmart 50+% of all people involved in investing to be slim, so I figure that a balanced portfolio of index funds with low admin fees is as prudent a course as any.</p>
<p>Buying rental property is a great idea if you want a third job as a landlord. Not all are cut out for that career.</p>
<p>Rental property is one way we invested some inheritance money years ago. Even if you aren’t interested in being an active landlord, you can always hire a management company. The great thing is your monthly rental income makes the mortgage payment and it may even generate additional monthly income. At the end of the mortgage, your house is paid for and you’ve only invested a minimal down payment. We still have ours–it’s paid for and the monthly rent really helps the cash flow! Just sayin’–it worked nicely for us.</p>
<p>Do not buy rental property. All it takes is one bad renter. We had a managment company, a good one, and our horrible renter racked up over 20K worth of damage (going through a divorce, lost his job and took it out on the inside of our house.)</p>
<p>Never, ever, again will I own a rental property. And when I share our horror story with others, a lot of people have shared their own horror stories with me.</p>
<p>You will get many different opinions based on where people are in their lives, their risk tolerance, and their income. I suggest you work with a fee-based financial planner to help you make the best plan for YOU. Mention that you want to be in Vanguard, want more in your 529s, need more than you have saved for retirement.</p>
<p>Depending on what is left on your mortgage and cars, I would pay off all the debt and be debt-free. I like owing no one. Then look at your emergency fund: do you have 3-6 months socked away? What will happen to DH’s business upon his retirement? Will your pension be enough to live on or should you start maximizing your retirement funds? You should fund your retirement fully before socking it all into college. No one will loan you money to retire, but your kids can take some minimal loans if needed.</p>
<p>If you are very new to the investing world, park it in a safe bank CD while you methodically make your plan. This is not the time to guess or throw darts. JK, but you get the idea.</p>
<p>Another fan of rental properties here. Wouldn’t invest the whole amount, but a down payment or two could be a good investment. We owned 2 properties for 15 years and they funded almost 6 years of college tuition.</p>
<p>dentmom4, most of what you say is current conventional wisdom, which you’ll hear over and over on financial shows. I disagree with almost all of it. </p>
<p>To the extent that a fee-based financial planner gives you any advice you couldn’t figure out on your own it is as likely to be wrong as right. (The last two I worked with gave me 180 degree wrong advice. Fortunately I ignored the second one.) You can get a Vanguard “fund of funds” which is rebalanced each year in an appropriate manner for your targeted retirement date, and the admin costs are minimal.</p>
<p>I completely disagree with “fully funding” retirement before paying for your kids college - “after all, they have their whole lives to pay back their student loans.” I can scale back my retirement lifestyle to suit my resources. Why should my kids start out in a hole? It’s hard enough to get started in life without having to pay off a bunch of debt before you start your first day on the job. No one really knows how much income they’ll need in retirement - it’s all really just a guessing game. But I do know my kids are saving towards buying their first houses, and have been since their first real “career job” paycheck. </p>
<p>It looks like MidwestJen and her husband will have her pension, his social security, and (depending on the state) possibly her SS as well. They may be able to sell his business when they retire. I don’t see this family as a good candidate for making the kids take out student loans. Everybody has their own values on this, but the financial gurus who insist that parents should be socking away their savings for retirement (and paying a financial adviser out of that money) while blithely telling their kids to borrow money for college really bug me. Is this really the ethos of our generation?</p>
I hear you, but I think that this advice is largely intended for people who would spend almost all of their retirement savings on their kids’ fancy college educations, not those who are trying to save their offspring $10k in debt.</p>
<p>Just to put numbers to the idea of giving your kids a debt-free college education: it’s just not the same thing if your retirement savings go from $1.5 million to $1.2 million, as if said fund goes from $350k to $50k. </p>
<p>Which is to say, I think that the value of the “fully fund your own retirement first” advice is as much a function of your income bracket as it is of your values.</p>
<p>First thing…very first thing…fully fund your Roth IRA for you and your husband. 5.5K/yr each if you are less than 50, 6.5K/yr over 50. Do this every year. Vanguard is great, low cost, easy to work with. You will NEVER pay taxes on the gains from these funds, and these are the last things you should ever cash in. Should you want to do the most generous thing possible for your children, if you don’t end up needing this money…if you fully fund these Roths every year that you can, you could potentially leave them a multi-million dollar inheritance, tax free. I would also put it in something that has the potential to increase greatly over the years, not super safe investments. Small cap, mid cap, S&P.</p>
<p>If you run the numbers, your jaw will drop. Forget paying off the mortgage at that interest rate. Whatever you decide to do, look at fully funding the Roth every year you make earned income until you don’t work anymore, run it with differing rates of return…and see what it comes to 20, 30, 40 years from now. You will leave your children wealthy, purely by this one minor investment.</p>
<p>I feel very strongly about this because I finally started thinking closely about our finances, and this realization just hit me. We will have spent 1 million dollars when our last kid graduates from college, on private schools 1st grade through college. I don’t regret it, they had an amazing education and it has shaped whom they are today and whom they will become. They didn’t have to deal with bullies, and have been surrounded by confident, brilliant people. But had we funded their Roths starting when they were ten, for 30 years (and of course at some point they could have funded it themselves), when they were 40 (at our investment advisors rate of return), it would have been worth over 4 million dollars. Tax free. It makes me ill.</p>
<p>You can still do this for your own kids, via your own Roth, as it is passed tax free to your beneficiaries. You have a big windfall, why not?</p>
<p>^^Yep, I know about the earned income. Apparently the way people do this is start some sort of small business (in our case it could have been rental properties), hire their kids and pay them an income. There may be some dispute on how much value a ten year old or a teenager can provide, but I could have wrung some useful work out of their little hands. Instead, I’ve always gotten their work for free.</p>
<p>But remember the social security taxes that have to be paid on that income.</p>
<p>Also, you have to file a return and report that income for the child because the IRS does match earned income to the amount contributed to the IRA.</p>