‘We are attempting to decide what to do with $400K in cash’: How can we maximize $400K in cash from selling our house to secure our financial future?

Hi Money Minder,

We’ve been renting our house for 18 years, and it just sold for $580K, which is way more than the $178K we paid for it back in 2001. After settling all debts and loans, we’re left with $400K cash. We know we’ll have to pay taxes on the capital gains, but we’re not sure how much exactly. Can you help us figure out how to use this money wisely by the end of the year? We want to avoid any surprises.

Right now, the $400K is just sitting in a savings account earning 4.2% interest annually. Should we invest some of it in mutual funds, S&P, or take some risks? We’re worried that buying stocks or mutual funds might increase our tax liability. We really don’t want to have to sell off any stocks to pay for taxes.

We have money in other accounts like thrift savings, IRA, 401k, and the stock market, but we don’t want to touch those. Our main home has a mortgage of less than $257K at a 3% interest rate, and it’s valued at around $700K. We’re in our 50’s and don’t have any other debts.

Thanks in advance for your help, Money Minder!

Retired and Ready to Invest

Response from THE MONEY MINDER:

Hello There,

Congratulations on the successful sale of your rental property! It’s evident that you’ve made a wise investment over the years. Now, with $400K in cash on hand, it’s essential to approach the next steps thoughtfully and strategically. Firstly, it’s commendable that you are conscious of the tax implications on capital gains. Anticipating the tax liabilities is crucial, and consulting with a financial advisor or tax professional can help provide clarity on the exact amounts to set aside.

Considering your current financial portfolio, diversification seems prudent. While a 4.2% savings account is safe, exploring other investment avenues could potentially yield better returns over time. Allocating a portion to a mix of mutual funds, S&P, or other moderate-risk investments may be a practical approach. However, it’s essential to consider the tax implications of such investments, especially concerning capital gains.

Given your age and financial standing, prioritizing long-term financial stability and security is vital. Considering your mortgage on the main home and its current value, perhaps allocating a portion of the cash towards paying off the mortgage principal could be advantageous, reducing interest payments over time. This, coupled with diversified investments, could help optimize your financial resources effectively.

It’s noteworthy that you have other funds in various accounts, which you wisely choose not to touch. Ensuring a balanced approach where you leverage the available cash efficiently while maintaining financial prudence is key. Overall, taking a strategic and pragmatic approach with the guidance of a financial professional can help navigate the complexities of managing the proceeds from the property sale effectively.

All the best from THE MONEY MINDER.