05 Jun Options for saving an influx of cash

 Q. My daughter has her Sweet 16 coming, and I expect she’s going to get a lot of cash gifts. What’s the best way to invest it? We may use it for college or a car, or for future savings for her. Help!

A. Trying to decide what to do with an influx of cash — whether it’s from party gifts or from an inheritance — all has to do with the time frame in which you plan to spend the money.

You’ve mentioned several time frames here for several possible goals.

If the assets are to be used in the next 18 months or sooner, you should consider depositing them in cash/savings accounts which offer liquidity and ease of access, said Ron Garutti, a certified financial planner with Newroads Financial Group in Clinton.

“It could be detrimental to put dollars at risk that are going to be used in a very short time frame,” he said. “I would review online high yield savings accounts available by FDIC-insured institutions.”

If the time frame is three to five years or more, Garutti said, an investment vehicle such as a brokerage account holding a mix of equity and fixed income securities that offer more potential for upside gain could be an option. Just make sure you consider and understand the risks associated with exposure to these categories.

“The combination of debt securities like bonds and equities like stocks could be used to increase potential return and have a lower risk level than an all stock account,” Garutti said. “It is important to keep in mind that investments will fluctuate and may be worth more or less than originally purchased.”

If the money is going to be used for college, she could consider a 529 plan, Garutti said.

“A 529 college savings plan is a tax-advantaged investment program designed to help pay for qualified higher education costs,” he said. “It is important to note that participation in a 529 does not guarantee that the contributions and investment returns will be adequate to cover higher education expenses.”

That being said, 529 plans generally offer investment options of varied risk levels, including very conservative choices for short-term investors, he said.

“At age 16, I would not recommend a lot of risk if this money is to be used for college,” Garutti said. “She could explore age-based options that allocate the investments according to the time frame for when they would be used.”

Andy Kapyrin, the director of research with RegentAtlantic Capital in Morristown, said you should look at all 529 Plans, not just the one offered in New Jersey.

“New Jersey does not offer a tax deduction for 529 plan contributions, so it makes sense for New Jersey residents to look across the nation for the most competitive 529 plan offerings,” he said.

If the money won’t be needed for college, you can consider longer-term savings that would jump start her portfolio.

Kapyrin said if your daughter will have any earned income from a job this year, she could use the cash gifts to start a Roth IRA.

“Roth IRAs get no up-front tax deduction, but do offer tax-free growth under current law,” he said, noting there will be many years the Roth investments could grow before she taps them for retirement expenses. “To maximize the benefits of a Roth IRA, put the cash to work into investments with the highest potential for return – a globally diversified fund with a high allocation to stocks may be a good choice.”

If she won’t have any earned income this year, you can fund a Uniform Transfer to Minor Act account (UTMA). UTMA accounts don’t enjoy the tax benefits of Roth IRAs, but they do allow you to put the cash to work in a long-term investment strategy, Kapyrin said.

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This story was first posted in June 2015.