15 Jun Investing a lump sum when college is close

 Q. We are selling a rental property and we will receive $100,000 in equity. We actually will show a loss for this property. We want to use the money for college costs for our youngest. We have also saved $8,500 in a 529 Plan, $13,000 in a Coverdell account and $25,000 in mutual funds. We hope we’ll have a total of $150,000 by 2016, in time for the college bills. Where should we put the $100,000 — we don’t want to be too conservative — and when college starts, where should we pull money from first?

A. You’ve done a great job saving!

Seems like your child will start college in the fall of 2016.

That doesn’t give you much time.

So with such a short time-horizon until you will need to start accessing funds — approximately 13 months when they start to four years when they graduate — you should probably be conservative so you can protect capital, said Gerard Papetti, a certified financial planner and certified public accountant with U.S. Financial Services in Fairfield.

“At best, you will have two years before you may need to start distributions from the $100,000 equity from the sale of your rental property as the existing mutual funds, Coverdell Education Savings Account and existing 529 Plan account may cover the tuition for 2016–2017, depending on the costs to attend the selected college,” Papetti said.

He recommends you put the $100,000 of available funds from the sale of your rental property into a 529 Plan, and you can use the existing account. He said you should then choose a conservative allocation because your time horizon is too short to invest a majority of the funds in growth assets.

“One alternative that 529 Plans offer is an age-based portfolio which will allocate the funds typically bonds to provide a competitive current yield with a smaller or no allocation toward stocks,” Papetti said. “If you want to be more aggressive, a balanced allocation may be more appropriate, but more risky due to your time horizon.”

Another option, because the money will be needed in stages, is to set up a different investment strategy for each stage, said Brian Power, a certified financial planner with Gateway Advisory in Westfield.

With this strategy, you could split the money into fourths — one earmarked for each year of college.

Power said with the money you need in one and two years, he recommends investing in something completely stable, such as one- and two-year Certificates of Deposit (CDs).

“Do not expose it to anything that can fluctuate in value,” he said. “The trade-off is not worth trying to get a better return with the potential to lose money over a two-year period of time.”

As the time frame stretches past two years and you now have three and four years until you need the money, you can consider investing the funds into something that might have the potential to grow better, such as a balanced mutual fund, even though there might be higher potential for the money to go down, he said.

“The longer the time frame, the more time you will have for the money to rebound if it does go down,” Power said.

As for the order in which you should pull out your other savings, Power says you should keep the money in the tax-advantaged accounts (529 and Coverdell) until last so you get the biggest tax benefit from those assets.

Papetti agrees, saying you should start with the mutual funds, noting that depending on the cost basis and holding period, you may want to spread out the liquidation to minimize the tax impact.

Also on the tax front, Power said the net loss from the sale of the property will actually be helpful to have on your tax return for financial aid purposes because it should lower your income for 2015.

And finally, now that the money is liquid, he says it’s best to keep the funds in your name and not put into your child’s name.

“This would be very bad for financial aid purposes,” Power said.

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This story was first posted in June 2015.