Summary/TL;DR
If you have extra cash and are unsure what to do with it, consider superfunding a 529 Savings Plan for your children or grandchildren (which could bestow a $1M+ Roth IRA to them in retirement), make backdoor Roth IRA contributions for yourself and your spouse, live off it and increase the savings to your employer retirement plan, or simply invest it alongside the rest of your long-term portfolio.
Introduction
One of the most common questions I’m asked when people learn that I’m a financial planner is, “What should I do with all of this cash? I know I need to do something with it, but I don’t know what my options are.”
In today’s post, I discuss four excellent options that will ensure that you make the most of your extra cash.
1) Superfund a 529 Savings Plan
529 Savings Plans are tax-advantaged investment accounts that may be used to pay for higher education. Funds contributed to a 529 are considered “gifts” for tax purposes, capping the amount that may be contributed (without triggering gift tax consequences) at the annual gift exclusion, which is $19,000 per individual in 2025. However, thanks to a special provision in the tax code, you can make a single contribution worth up to five times the annual gift exclusion (which would be $95,000 per individual in 2025) without incurring gift tax consequences! Contributing to a 529 this way is a strategy known as “superfunding”.
As an example of how powerful this could be, suppose you and your spouse superfunded a 529 savings plan for your child or grandchild soon after they were born and left the funds to grow for 18 years until they needed them for higher education. In 18 years, you’d have over $1,000,000 saved (all tax-free!) assuming a 10% annual rate of return. Any unused funds may be rolled over to a Roth IRA (up to certain limitations discussed below), or into another 529 Savings Plan for any other qualified family member of the 529 beneficiary.
Another great characteristic of 529 Savings Plans is that you can rollover up to $35,000 into a Roth IRA for the beneficiary! There are some rules that you need to follow to do this correctly (which I ’ve written about here), but this is an excellent way to give your loved one a “head start” on their retirement savings. As an example, if you completed a $35,000 529-to-Roth rollover when the 529 beneficiary was 18 years old, it would grow to over $1,900,000 (all tax-free!) by the time they’re 60 and able to access the funds (assuming a 10% annual rate of return)!
2) Make Backdoor Roth IRA Contributions
Roth IRAs are the gold-standard of long-term retirement savings, as all growth accrued to the investments within them are tax-free upon their eventual distribution. Unfortunately, many individuals believe the myth that they make too much money to contribute to a Roth IRA and unnecessarily forgo this incredibly powerful account.
I’ve written in detail about backdoor Roth IRA contributions here. In short, they are a way for anybody, regardless of their income level, to make Roth IRA contributions. It involves making a non-deductible contribution to a Traditional IRA and immediately converting that contribution to Roth. Special care must be taken to ensure that the “pro-rata” rule is not triggered, but a competent planner can guide you through this without creating trouble.
The maximum Roth IRA contribution in 2025 is $7,000, plus an additional $1,000 for those over the age of 50. Married couples can therefore get an extra $14,000-16,000 into Roth IRAs every year that they take advantage of this strategy. Finally, special care must be taken to report backdoor Roth IRA contributions to the IRS correctly, so I would never recommend a consumer attempt to make backdoor Roth IRA contributions without the assistance of a professional.
3) Live Off Of It, And Increase Your Employer Retirement Plan Savings
Another great option is to turn your extra cash into an income stream and increase the savings into your employer’s retirement plan. This effectively “reroutes” your savings to more efficient paths and optimizes your long-term investments for maximum tax-efficiency. This can be incredibly powerful for business owners who have the ability to make profit sharing contributions to their 401(k) plans, or to individuals whose employers allow mega-backdoor Roth conversions to be made within their plans.
4) Invest It!
If you’ve done all of the above and still have additional cash on the sidelines, then you should really consider investing it to slow or reverse the erosion of its value to inflation. What you invest it in will primarily be a function of your time horizon, with funds being needed over a shorter time frame being invested in more “conservative” assets. My favorite rule of thumb is to invest anything that’s needed within 3 years in the money market, anything within 3-5 years into dividend stocks, and everything else into equity index funds and, when appropriate, Bitcoin and real estate.
Suppose, for example, that after completing all of the other objectives above that apply to me, I have $500,000 in cash and have the following goals. I have a daughter getting married next year and estimate the wedding to cost $50,000 and also want to help her and her husband purchase a new home by providing a $100,000 down payment.
Furthermore, I have a feeling that within some point during the next 5 years I will need to begin supporting my parents and would like at least $150,000 set aside for this purpose. Given the generalized rules I mentioned above, I would invest $150,000 of my cash ($50,000 for the wedding plus $100,000 for the down payment on the home) into the money market, $150,000 (for my parents) into dividend stocks, and the remaining $200,000 into an ordinary brokerage account invested in a mix of stocks and Bitcoin.