We are officially nearing the end of the first quarter of 2023, and inflation is still omnipresent as the Federal Reserve ratchets up interest rates. However, a string of bank failures and mergers making international news and volatile stock and bond market swings have resulted in us receiving multiple phone calls regarding where people should deploy newly earned cash. Thus, we want to share several ideas based on the various questions we have received.
Long-Term Goals & Tax-Benefits
If you have ten or more years until the money in question is needed, stick to your financial plan and invest the money in a mixture of stocks and bonds appropriate for your age.
While you certainly will face a roller coaster ride in the short term, investing for the long haul and not timing the market has been proven repeatedly as the best way to grow your money using a well-diversified portfolio.
Two outstanding tax-advantaged accounts for savers with earned income are the traditional and Roth IRA, which have an annual combined limit in 2023 of $6,500. Plus, those fifty or older can contribute an additional $1,000 to help them as they get closer to retirement.
It is also worth noting that you have until the tax deadline of the following year to make IRA contributions. In 2023, you have until April 18th to fund last year's IRA contribution cap, which was $6,000, plus a $1,000 catch-up for fifty-plus individuals.
Therefore, some folks who have yet to make 2022 and 2023 contributions could defer up to $14,500 in a tax-advantaged manner!
Individuals who have already funded their IRAs to receive tax benefits or have shorter-term goals should consider I Bonds, which currently pay a 6.89% interest rate.
Last year we wrote a blog post on I Bonds, but 2023 is a new year. We want to remind you that you can purchase $10,000 in I Bonds annually!
These investments have the full faith and backing of the US Government and track inflation rates, which remain elevated, making them a solid choice for those who can lock up their money for a minimum of one year.
ARM-Mortgage? Consider Paying It Down
One tried-and-true method to strategically deploy extra cash is paying your mortgage down. While this does not make sense for those with low fixed-rate mortgages, borrowers with adjustable-rate or new fixed-rate loans near or above 7% can benefit. After all, the Federal Reserve just increased rates again this week.
Short-Term Treasuries & Money Markets
On the topic of the Federal Reserve rate increase, short-term US treasury and money market funds are now attractive investments to park cash that is needed within the next year and are often paying above 4.65% and 4.25%, respectively.
Thus, even those with larger cash balances to park for only a few months have great options.
A Warning About Cash Holdings Above $75,000
For Minnesota residents, it is essential to know that any personal property cumulatively worth $75,000 or more will trigger probate proceedings. Therefore, those with large cash reserves must be mindful and consider setting up a trust to hold their funds. If you already have a trust set up and are a client of ours, it is imperative that you let us know if you are holding extra cash so we can ensure it is registered properly in your trust.
Unsure What To Do?
While various options exist for investing cash, you should choose the best one for your situation, given your need for liquidity and risk tolerance. At Lundeen Abrams Advisors, we work as Fiduciaries to help our clients find the best investments given their unique needs, and we are here to help if you are unsure where to start. Please call us and schedule an appointment today if you are unsure what makes sense for your cents.
We look forward to talking with you soon!