Lump Sum of Cash

[Letsdoit]

We are coming into a lump sum of cash and I want to make sure I make the right choice of what to do with it. We currently invest fully in my husbands 401k and IRA as well as my IRA plus $200 per month in an index fund and $50 in a 529. We hope to retire before 59 and my husband is 10 years older than I am. I don’t get a company match so we were holding off on contributing to my 403b until we finished paying for our last year of daycare. Our two choices for the cash are:

1) Prepay for the remainder of daycare (around $18,000) and start maxing my 403b now. We would probably still have about $10,000 left to dump in an index fund at Vanguard.
2) Dump all the cash into an index fund with Vanguard, continue to pay monthly daycare costs until September 2019 and then start maxing my 403b at that point.

I lean towards #1 simply for the psychological impact of getting used to a substantially smaller paycheck coming home for me since that’s going to happen eventually anyway.

Thoughts?

 

[Luck_Club]

I'm not a big fan of 529 plans.

Schools may set their own rules on how to award need-based aid, so the reduction in aid for 529 plans varies, but could be as much as 25 percent of the value of the asset.

Others prefer this method of paying for their child's education.

 

[meierlde]

I'm not a big fan of 529 plans.

Schools may set their own rules on how to award need-based aid, so the reduction in aid for 529 plans varies, but could be as much as 25 percent of the value of the asset.

Others prefer this method of paying for their child's education.

Given that giving money directly to the child affects financial aid just as much or more plus the possibility if Investments do very well of high tax rates on unearned income from the portfolio (37% above 12,800 a year due to the new version of the Kiddie Tax) It is not clear what alternative you would recommend.

 

[RobbieB]

Prepay for daycare sounds like a bad idea. What if they become not viable?

Stash the cash (emergency fund) or invest it, or 50-50 would be my choice.

Well not, who am I kidding? I'd just put it in checking and blow that dough!

 

[Sunset]

Pre-paying the daycare could mean you lose the money so why risk it.

Money is fungible
So whatever you pay the daycare monthly, pay them from the sudden cash pile per month. And with the increase in pay you now feel, put that into the 403b.

With the cash pile, put the estimate of 10K into Vanguard index, and put the rest into Ally bank or some other online bank that pays about 1.4% interest, (some of it could even go into Ally's 11 month no penalty CD earning 1.6%). That is the money that will pay the daycare.

You don't mention the amount of IRA/401K/etc you have and don't mention Roths, be aware that Roths are nice to have once you have already built up a bunch of IRA/401K.

 

[Senator]

Are you paying for your day care with a credit card now? And collecting any credit card cash back?

 

[Letsdoit]

With the cash pile, put the estimate of 10K into Vanguard index, and put the rest into Ally bank or some other online bank that pays about 1.4% interest, (some of it could even go into Ally's 11 month no penalty CD.

You don't mention the amount of IRA/401K/etc you have and don't mention Roths, be aware that Roths are nice to have once you have already built up a bunch of IRA/401K.

I wasn’t aware that Ally offered interest rates like that. That would probably make me feel better than just leaving that much money in our savings account making .1%.

We currently having about $700,000 in IRAs and 401k. We max the 401k for my husband with an even investment into traditional and ROTH(about 14% of his income) with a 7% company match going into the traditional 401k and then contribute to ROTH IRAs for both of us. My 403b would also be traditional.

 

[Letsdoit]

Are you paying for your day care with a credit card now? And collecting any credit card cash back?

No, it’s cash or check only so that’s not an option.

 

[pb4uski]

By pre-pay for daycare do you mean that you would write the daycare provider a $18,000 check? If so, bad idea. Or did you mean that you would just keep the $18,000 in checking or savings and pay it out as services are provided? That makes more sense to me.


Also, what is your marginal tax bracket? If 15% or lower I don't see any advantage to the 403b. If higher then it may make sense.

 

[street]

I would not pre-pay daycare you are losing on that deal. I would invest that 28K and keep paying as you go each month for daycare. Just the way I would handle that money.

 

[Letsdoit]

By pre-pay for daycare do you mean that you would write the daycare provider a $18,000 check? If so, bad idea. Or did you mean that you would just keep the $18,000 in checking or savings and pay it out as services are provided? That makes more sense to me.


Also, what is your marginal tax bracket? If 15% or lower I don't see any advantage to the 403b. If higher then it may make sense.

Under the new tax code we will be at 22%.

Up until now we have opted to pay the school in monthly installments but they offer the option of paying per semester or annually. The annual payment does come with a small discount (maybe equaling a few hundred bucks). If we were to go with the option of "pre-paying" the school, wewould just opt for the annual lump sum payment when the initial deposit is due for next year rather than paying monthly.

 

[pb4uski]

Then I guess it would depend on how attractive the discount is vs bank account interest rates and your confidence that they will be there for the term.

 

[jazz4cash]

Not sure what the source of the lump sum is, but if it's tax free like an insurance payout, I always love the idea of putting it into a Roth so the principal and earnings are all tax free.

 

[Aerides]

That would probably make me feel better than just leaving that much money in our savings account making .1%.

Almost any online bank is offering 1%, so make that change for your savings regardless what you do with this new windfall (and yes, don't prepay the daycare - what if you want to bail on them in 6 months).

 

[travelover]

Almost any online bank is offering 1%, so make that change for your savings regardless what you do with this new windfall (and yes, don't prepay the daycare - what if you want to bail on them in 6 months).

The Vanguard money market fund is paying 1.4% now.