By Quentin Fottrell
'I've never had this kind of money before, or access to this kind of money'
Dear Quentin,
I'll be inheriting about $100,000 very soon. It all depends on when probate is settled. I've never had this kind of money before, or access to this kind of money, so I know nothing about investing. I am only interested in zero risk. I saw a billboard for a bank that has a 13-month certificate of deposit for 5.5%.
Is that a good interest rate, or an average one?
I don't even know what my savings account pays, since I usually have about $2,000 deposited in it, and based on that low amount, the interest is basically negligible. For that CD, I'd be perfectly happy to earn $5,000 a year on it, but are there more lucrative zero-risk options?
Also, do I report the interest on my tax return?
Soon To Be $100,000 Richer
Dear Richer,
Some people have lost that amount in stocks. Others dream of having a net worth of $100,000. And some folks earn $100,000 a year but bemoan the fact that their partner does not also earn a six-figure salary. Yours is a good story: You are grateful, you want to plan ahead and you are already thinking of the tax implications of your investments.
And so congratulations on your windfall, and condolences if you have lost someone close to you. You are fortunate to be in a position to have such a cash cushion. Whether or not you are just starting out in your career -- and depending on where you live in the U.S. -- this money could also help you with a down payment on a property, allowing you to get a foot on the property ladder.
But as to your initial question: Is 5.5% a good rate or an average rate? The answer is, both. The return on CDs has more than doubled over the last 12 months, and rates are currently in the 5%-plus range, particularly for high-yield, online accounts. Some have no minimum deposit restrictions or else have minimums of a couple of thousand dollars, while others have $25,000 minimum deposits.
"Competition among financial institutions provides investors with a broad menu of choices when it comes to CDs," according to Ken Tumin, founder of DepositAccounts.com, which tracks rates. "Banks and credit unions are battling it out for deposits, so they offer savers plenty of different CD maturities at very competitive yields."
Do you have to report the interest you earn from CDs to the Internal Revenue Service? Yes. Here's a longer answer: A CD is basically a time-limited savings account -- and the interest you earn on your CD should be reported as taxable income, unless the money is stored in a tax-advantaged account like an IRA CD.
Implications for taxes -- and beyond
With interest rates so high, prices still elevated and the stock market continuing its unpredictable seesaw act, making money off your cash is an increasingly popular option for savers and investors alike. In addition to CDs, other zero- or close to zero-risk options include high-yield savings accounts, checking accounts and short-term Treasury debt. Money-market funds are also extremely low risk.
I recently wrote a story about how to invest $100,000. I suggested companies with a higher return on equity, lower leverage and more consistent earning profiles. Investing a small portion in the stock market can also help you learn about compounding -- that is, earning money on your initial investment and on your investment's return. But they all carry risk.
You can do a lot with $100,000. This woman from Texas wrote to me five years ago. She was living at the poverty line and inherited $150,000, which was the most money she would likely ever see in her lifetime. Her story continues to inspire me, and she has maintained a long correspondence with me and MarketWatch readers over the last five years.
The money, she said, was a "life changer" She paid off her car, bought a "tiny home" and deposited $70,000 in a high-yield online savings account. She topped up her retirement portfolio and invested $30,000 into emerging markets. She maxed out her IRA and invested $10,000 between very safe dividend stocks and exchange-traded funds. She also spent $7,000 on dental work in Mexico.
Earlier this year, she updated MarketWatch readers on her life in her third letter: "My tiny house has been one of the greatest decisions I've ever made, and has truly changed my whole mindset on what makes me happy." Her final words? "Investing is truly empowering. I didn't know that before, but I know it now, and I wish it for many more Americans."
Whatever you decide to do with your $100,000, I wish the same for you.
Readers write to me with all sorts of dilemmas.
By emailing your questions, you agree to have them published anonymously on MarketWatch. By submitting your story to Dow Jones & Co., the publisher of MarketWatch, you understand and agree that we may use your story, or versions of it, in all media and platforms, including via third parties.
The Moneyist regrets he cannot reply to questions individually.
More from Quentin Fottrell:
My wife and I want to retire to the Philippines. We have $193K in savings and $280K in investments, and own a $365K home. Can we do it?
My husband ran away to another state, bought a home and opened credit cards. Am I responsible if he defaults?
My wife and I are turning 50. We have $800K in our 401(k)s and IRAs. Should we withdraw $100K to buy our dream home for retirement?
-Quentin Fottrell
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08-26-23 1737ET
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