How To Invest $20K: 7 Ways To Increase Your Wealth

If you have $20K in cash sitting around, here are 7 ways to make your money work for you.

How to invest 20k
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Wisely investing $20K can lead a nice chunk of money over the long-term

Perhaps you have an excessive amount of money in your emergency savings, you inherited some money, or you had an unexpected windfall. And instead of earning close to 0% at your local bank, or any bank for that matter, you want to invest your money to increase your wealth.

While $20K is certainly not a small sum, don’t quit your day job just yet. However, with the right strategy, you can set yourself up for long-term success.

1. Max-Out Your Traditional Retirement Accounts

The most common types of retirement accounts are 403B and 401K plans. These plans are funded with pre-tax dollars via payroll deductions. If you have $20K sitting in your bank, one of the wisest ways to invest $20K is by increasing your retirement contribution percentage at your employer. You are effectively doing a 401k swap by using the cash on hand to supplement your decreased paycheck.

However, it’s important to note the contribution caps for those under 50:

401(k): Most for-profit companies sponsor this type of plan. It allows you to contribute pre-tax dollars to your account. The maximum contribution amount for 2021 is $19,500.

403(b): Also called a tax-sheltered annuity or TSA plan. If you’re a teacher or work at a non-profit 501 (c) (3), then you most likely are offered this type of retirement plan. The maximum contribution amount for 2021 is $19,500.

Most employers make it reasonably easy to increase your contribution amount. Adjustments can generally be made through your company portal or a form provided by your retirement servicer.

Once you invested your desired amount, decrease the contribution amount, so you do not go over the contribution cap.

This brings me to my next point…

2. Open A Back-Door Roth IRA

Back-Door Roth IRAs allow you to invest up to $6,000 in after-tax money. The withdraws are tax-free once you reach age 59 1/2 and the account has been open for at least five years.

You could use your $20K to fund three years of Back-Door Roth IRA contributions!

One interesting benefit of Back Door Roth IRAs is that you can withdraw up to $10,000 in earnings if you are withdrawing to make your 1st home purchase (you need to have your account for at least 5 years).

Back Door Roth IRAs had generally flown under the radar until Pro Publica recently published an article documenting how investor Peter Thiel has a Roth IRA worth $5 Billion! Thiel’s case is extreme and highly unusual compared to your average investor.

Anyway,

Here are the basic steps for opening a backdoor IRA

  1. Open a Traditional IRA.
  2. Fund the traditional IRA with after-tax dollars (limit is $6,000 for 2021). Don’t invest in anything just yet. Just add the cash.
  3. Open a Roth IRA.
  4. Contact your respective firm let them you want to do a backdoor roth IRA conversion.
  5. At this point, the firm will either give you a form, or require some further documentation, depending on the company.
  6. Once your money is transferred to your Roth IRA you can invest the money as you see it.

I did backdoor Roth IRAs at Vanguard and TD Ameritrade. The process is very straightforward. The whole process should take about a week.

I know what you’re thinking, this seems “complicated”, don’t worry there are other options too…

3. Open A Traditional Brokerage Account

When you open a traditional brokerage account, you fund the account with after-tax dollars. You will pay capital gains taxes on any realized earnings, e.g., when you sell a stock or mutual fund and make a profit. Traditional brokerages offer stock, bond, mutual fund, ETF, options trading, and margin accounts. These services are what most investors require.

There are quite a few options for brokerage accounts, and most of them generally offer similar services. Hence, it’s usually a matter of preference for which company is considered the “best.”

A few big-name brokerages such are:

  • TD Ameritrade
  • Charles Schwab
  • E-Trade
  • Vanguard

To name a few. In addition, some of the fintech firms such as Robinhood, SoFi, M1 Finance often offer bonuses for opening accounts with them, if that is appealing to you.

Lastly, a new player in the brokerage space, All of Us Financial, will pay you a portion of their commission on payment order flow and securities lending. That means a hypothetical $25,000 portfolio could earn $250 just from their routine trading activities.

All of Us Financial is the only brokerage that offers rebates on its payment for order flow, so this company is worth checking out!

Note: Read more about payment for order flow and securities lending in my full review of All of Us Financial.

4. Fund A 529 Savings Plan For Future Education Costs

After-tax dollars are used to fund a 529 plan. Withdraws are tax-free when they are used for qualified education expenses. Qualified expenses are amounts paid for tuition, fees, and other related expenses required for enrollment or attendance at an eligible educational institution.

How To Invest 20K
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529 plans are a great way to create generational wealth as there is no limit on the number of accounts you can fund.

In addition, investing in a 529 plan is also a great way to create generational wealth because there are no limits on the number of 529 accounts you can fund.

You may not have children now, but you can open a 529 Saving Plan in your name and transfer it to your future children, even if that is 5 or 10 years down the road. 

Time is our best friend in the investing world!

The cost of college tuition has risen by more than 25% in the last 10 years, so it’s never a bad idea to invest 20K for future education expenses.

I recently discovered an exciting company called Fabric. This company offers life insurance, Wills, 529 savings plans, high yield savings account, and family finance tools making personal finance a seamless process for young families.

Many states also offer their own 529 plans, but it’s not always required to open through your home state. However, there may be tax deductions or credits by opening through your home state.

Alternatively, most major retail brokerages also offer 529 savings plans, such as the companies listed above in point 3.

5. Consider Investing With A Robo Advisor

It’s understandable that not everyone has the investment acumen to just jump into the deep end. Perhaps you are interested in investing, but just don’t know how or where to start. A robo-advisor makes automated investment choices on your behalf that involve limited human intervention. The decisions are made on your behalf through information collected in a survey you fill out.

How To Invest 20K
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Robo Advisors make investment decisions based upon a survey you complete that includes goals and your financial situation.

The types of questions asked in the survey will touch upon your financial goals and your current financial situation.

Some Robo Advisors charge a management fee of around 0.25% – 0.50% of assets invested, and some are free.

A few popular Robo Advisors include:

  • Betterment
  • WealthFront
  • SoFi
  • Vanguard

Note: The important thing to consider is that you are getting investment advice based on your personal situation and eliminating the decision-making process from your end. In exchange, you may be required to pay a management fee. If that trade-off is worth it to you based on your unique circumstances, then perhaps Robo-advising is a wise choice.

6. Invest in Real Estate

Until a few years ago, the only way to invest in real estate was to buy a physical property yourself. Luckily, things have changed since then. There a quite a few companies that offer the opportunity to invest in real estate without the added stress of becoming a landlord.

A top-rated real estate investing platform on the rise is a company called GROUNDFLOOR. They specialize in short-term loans to flippers, with a time horizon of 6 – 12 months, and you can invest with as little as ten dollars.

Alternatively, If you are an accredited investor, two popular companies are Realty Mogul and CrowdStreet

Note: These investments are fairly illiquid, so make sure to do your research beforehand and understand the restrictions.

7. Invest in Peer-to-Peer Lending

Peer-to-Peer lending is the business of funding unsecured personal loans to qualified individuals via a platform instead of banks providing the loans. It’s an excellent alternative funding option from traditional banks or other lenders.

The types of loans can be for credit card consolidation, home improvements, funding a business, to name a few.

A few popular Peer-to-Peer Lending firms:

  • Prosper
  • Upstart
  • Payoff
  • Peerform

Note: Peer-to-Peer Lending has fallen out of style over the past few years. A pioneer in the field, Lending Club, started experiencing problems in 2016. The firm began having issues attracting investors, and there were scandals over some of the firm’s loans. In 2020, Lending Club announced it would be shutting down its P2P platform. That said, there are still plenty of opportunities to invest in P2P loans, it’s simply not as popular anymore.

The Bottom Line

Taking the initiative to invest $20K is a wise decision. There is no right or wrong answer on how to invest $20k. The most crucial point to consider is to decide what makes sense for your unique circumstances.

Everyone’s financial situation is different, but it’s essential to consider your current situation, goals, risk tolerance, and needs before investing.

Weigh the pros and cons of the above options against your objectives to help make the most educated decision possible.

How would you invest $20K? Comment below and let the RWPF audience know!

Cheers,

Adam
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