Dear Emilie: I’m panicking because I’m sitting on a pile of cash and feel paralyzed. What should I do with it? Save it for an emergency? Pay down my mortgage? Invest it? – Super Saver

Dear Super Saver: This is a good problem to have! Let’s set some priorities for using this money wisely and minimizing taxes.

First, do you have an emergency fund of readily accessible cash? Set aside three to six months of living expense in a money market fund or savings account. This is the money you can easily tap to cover living expenses if you lose your job.

If that’s robust, create a fund for other important short-term expenses such as property taxes, home maintenance costs, vacation plans and special events. This money should be easily accessible, in a savings account or money market fund.

Looking good? Then, consider a health savings account, or HSA. You fill it with pre-tax dollars, and the money can be spent, tax-free, for healthcare bills. The 2018 annual limit for families is $6,900. It’s $3,450 for individuals. You can even save and invest over time for retirement health care expenses, including Medicare insurance premiums. It’s not sexy stuff, but funding an HSA now can pay off nicely down the line.

If you’re squared away on those two categories, you can channel some cash into your pre-tax retirement savings accounts, such as your 401(k) or 403b. You can give your Roth IRA account some love, too. (You’ll pay taxes on the money you put into a Roth but can withdraw the money tax-free when you retire.) If your income is too high for a Roth, consider a “backdoor Roth IRA.” This strategy allows you to circumvent the income limits by converting a traditional IRA to a Roth IRA. High income earners typically will benefit from maxing out their pre-tax retirement plan contributions before considering a back-door Roth IRA contribution.

I always advise funding your retirement before you fund your kids’ college educations. They can get grants, loans and scholarships and have decades to pay off that debt, if needed. But no one is going to fund your retirement if you don’t, and you have a limited number of working years to save money and let it grow before you need it.

When your retirement accounts are on track, move cash into your kids’ 529 college savings accounts. Post-tax contributions there grow tax-free if they are used for qualified higher-education expenses. If your children don’t use all the money in the account, you can let the remainder grow for decades and be used by your grandchildren.

If you’re not done yet, consider making a payment towards your mortgage principal or putting money into non-retirement investment accounts.


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