09 Jan I have $60K set aside. How should I invest it?
Q. I have a good amount saved for retirement and I’m trying to build cash. I have about $60,000. As much as I’d like to use the money for retirement supplements, I think I will need to use it to pay for college. How can I decide where to invest it?
A. Congratulations on the savings.
What you should do with this money should be based on your goals.
First, you didn’t say whether this money was saved in a bank account or as part of your retirement savings in a 401(k) or IRA.
If it’s in a retirement account, you may not want to use the funds for upcoming college bills.
If you take this money out, you most likely will have to save more in the future to meet your retirement goals, said Matt Rembish, a certified financial planner with JFL Total Wealth Management in Boonton.
“You can take out a student loan, but you can’t take a loan for retirement,” he said. “Your retirement should be used as a last resort for college funding.”
If you decide you have no choice and you take funds out, you may be subject to a 10% additional tax on these distributions as well owe ordinary income tax, Remibish said.
‘Depending on your tax rate and whether the 10% additional tax applies, this can get pretty expensive,” he said.
If the $60,000 is cash in your bank account, you should still make sure you have at least three to six months of expenses as an emergency fund, he said.
If the money is indeed earmarked for college, you can open a 529 plan where you can make after-tax contributions and the money will grow tax-deferred. If this money is eventually used for qualified education expenses, withdrawals are tax free, he said.
“You can contribute $17,000 annually — 34,000 — per couple per 529 beneficiary for 2023,” he said. “If you stay below this limit, you will not have to worry about triggering any gift tax.”
You can also give a one-time $85,000 contribution that’s considered to count for a five-year period.
After you choose an investment company for a 529 plan, you’ll have to decide how the funds should be invested.
“Most will have age-based portfolios, where you will select the portfolio associated with the date the 529 beneficiary starts college,” Rembish said. “This works a lot like target date funds whereas the person gets closer to their college start date, the portfolio will get more conservative. It’s an ideal solution if you want a hands-off approach for how to invest the account.”
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This story was originally published on Jan. 9, 2023.
NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.