Parents giving me $200K for school next year- best place to keep it?

[throwawayfinancial]

So my parents are giving me lump sum $200K- no conditions or anything- for professional school. I start class next year. I'm trying to figure out the wisest place to store this money for now before I use it on school.

So far, I'm thinking of putting it away in a 1 year CD. But that only has a 1.25% APY.

Any recommendations?

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[Gpan]

I'll give u 2.5% if u let me borrow it to pay off my loans LOL

 

[InvestingDoc]

How about a CD Ladder? Have one year expenses in a savings account building low interest as you will need this soon to pay for medical school, put 50% in a one year CD and 25% in a 3 year CD. When you get to year #2 obviously you only renew the one year CD for half of what is in it as you will need those expenses for the second year of medical school. I wouldn't gamble by buying stocks or even mutual funds for this short of a term.

 

[goodoldalky]

put it all on black

 

[Mman]

How about a CD Ladder? Have one year expenses in a savings account building low interest as you will need this soon to pay for medical school, put 50% in a one year CD and 25% in a 3 year CD. When you get to year #2 obviously you only renew the one year CD for half of what is in it as you will need those expenses for the second year of medical school. I wouldn't gamble by buying stocks or even mutual funds for this short of a term.

the question is what kind of a rate are you going to get on a CD? You can get 1% ish in online savings/MM accounts that are FDIC backed. Is tying it up in a CD worth an extra 0.2% or 0.5% per year? To me the relative small difference in rate is nearly (or maybe totally) outweighed by the very short time duration until the money is needed.

I mean even if you found a 3 year CD for 1.5% and put 1/4 the money in it (50K), you are looking at a difference of about $250 per year. Considering the amount of money being discussed, it's not a huge reward for tying up your liquidity IMHO.

If I was trying to squeeze out every penny from it and wouldn't need to spend any for 12 months, I might considering keeping 60K in a MM account and then putting 140K in a 2 year CD if I could find one for 1.5% or so. The 60K would hopefully get you through the first year plus into the 2nd until the CD matures and then I'd probably just keep it all in MM account. I personally hate feeling like I've tied up every last dollar in a CD with the idea I might be counting down until maturity and needing it right away.

 

[RangerBob]

Congratulations--that's quite a wonderful gift.

If I'm not mistaken, your parents (not you) will need to pay taxes on that $200k. I think they can each give you about $15k (I could be off by $5k or so) each without having to pay taxes. It would be better for them to each give you $15k (total of $30k) for a few years for living expenses and then also pay tuition for you (I don't think it's taxable if they pay your tuition, since parents do that all the time, though maybe they need to claim you as a dependent, but they can claim higher education tax breaks that way as well).

It's definitely something worth looking into. I do not think there is any way they can give you $200k flat without them paying taxes on that, unless you do some legal maneuvering. And obviously double check that limit...

Personally, if my parents gave me $200k, I'd put it in two separate savings accounts (banks are usually only FDIC insured for $100k) and then use it to pay tuition over my 4 years of medical school. I don't see any point in trying to invest it for the short term--you're just not going to make much and if you are then it's going to be a risky endeavor. It's your call of course, but I'd put the financial freedom of now owing any (or much) at the end of medical school higher. You're going to make a great salary as a physician, even if you go into primary care, especially if hardly any of that income is going to paying off loans.

 

[Mman]

Personally, if my parents gave me $200k, I'd put it in two separate savings accounts (banks are usually only FDIC insured for $100k) and then use it to pay tuition over my 4 years of medical school.

Standard FDIC insurance limits are $250K per bank per depositor. If it was a joint account, they insure up to $500K but even in an individual account the entire $200K would be insured.

 

[bc65]

If I'm not mistaken, your parents (not you) will need to pay taxes on that $200k. I think they can each give you about $15k (I could be off by $5k or so) each without having to pay taxes

This is correct. The current gift exemption is $14,000. Each parent can gift you $14,000 tax free each year. The rest would be subject to gift taxes, unless the money is used to pay your tuition directly.

So your parents should pay your tuition directly. Also, this will allow them to take care of that money in the meantime. Presumably they have been doing a good job with it. That's why they have it.

 

[QofQuimica]

What I want to know is, are your folks in the market to adopt an older sister for you? I promise I will keep my room clean and help with the dishes.

All kidding aside, this is a wonderful gift and opportunity for you to get through school with no debt. I agree with the others: even with the option to gift five years' worth of money at one time tax-exempt, your folks should NOT give the money to you as a lump sum. You could definitely have them pay your expenses to professional school directly each year to avoid triggering gift taxes as bc suggested. Though if they have a large estate and are looking to start gifting money to you and your siblings for that reason, they really ought to consult with a tax planning and estate professional to help optimize the best way of doing this, as giving you each a large lump sum is likely not to be the optimal method. Good problem to have!

 

[dempty]

I'll keep echoing the sound advice-- do NOT put this money in the market. Your time horizon is too short and you might have to sell at a loss just to pay bills that you knew were coming. You want that money in cash (equivalents). If you're concerned about spending it, then maybe consider locking it up in a CD (or ladder a few, as was suggested).

Also, if you haven't put real money in the market and had the discipline to follow a strategy over a time horizon, it won't be pretty if you start by playing with at least tens of thousands of real dollars... sustaining paper (simulated) losses is nothing compared to seeing real wealth vaporize in a market pull back-- and it takes a lot to know just how long to take that ride for.

 

[Plastikos]

Maybe they can negotiate a 4 year price for school and pay that directly (no gift tax), and then gift you the rest (up to 56k tax free per couple, using in laws). If that doesnt cover it they can do another round the next year, etc....

 

[Igor4sugry]

So my parents are giving me lump sum $200K- no conditions or anything- for professional school. I start class next year. I'm trying to figure out the wisest place to store this money for now before I use it on school.

So far, I'm thinking of putting it away in a 1 year CD. But that only has a 1.25% APY.

Any recommendations?

I agree with other posters. Parents should have gifted you money for living expenses and paid tuition directly themselves.
Why not spread it out over 4 years?
Maybe use some money for a downpayment on a home, and then have other med students as renters.

 

[pineapplebasil]

I think one way you can avoid it being a "gift" is if your parents put the money in a joint account with you with 1) your parent's names, and 2) your name. This way, in terms of administering the money, it'll be easy for any of you to add or withdraw from the account. Also, it avoids the definition of "gift" (and therefore the strict IRS definition of gift) in the sense that there is a string attached- they're retaining some control over their money. You can then pay the tuition out of the joint account and if any questions ever come up down the line, you can at least point to the fact that their names were on it and you were only using it for tuition.

Personally, I think putting the money in a "Risk Free" CD is the best way to get at least some interest on what you don't spend (probably less than 1% or close to it). How the Risk Free CDs differ from traditional ones is that you can withdraw from them at any time in case you need money immediately, but they have a higher yield interest rate than a savings account (which these days is close to 0.5%). I know Bank of America has one of these types of CDs, I don't know if credit unions or other banks have it.

If you're absolutely sure of when you're going to withdraw from the account, then you could get a higher interest rate by locking some of the money in higher rate CDs (What @InvestingDoc says above). But if you end up needing the money for an emergency, then you'll pay a penalty which often negates any benefit the higher interest rates have.

EDIT: @Plastikos said it right. It's a nominal amount of interest. Even at 1% on the full $200K would only be $2,000 per year and you'd presumably use some of that to pay for your first semester, so any interest earned would be less than $2,000.

 

[Plastikos]

I think one way you can avoid it being a "gift" is if your parents put the money in a joint account with you with 1) your parent's names, and 2) your name. This way, in terms of administering the money, it'll be easy for any of you to add or withdraw from the account. Also, it avoids the definition of "gift" (and therefore the strict IRS definition of gift) in the sense that there is a string attached- they're retaining some control over their money. You can then pay the tuition out of the joint account and if any questions ever come up down the line, you can at least point to the fact that their names were on it and you were only using it for tuition.

Personally, I think putting the money in a "Risk Free" CD is the best way to get at least some interest on what you don't spend (probably less than 1% or close to it). How the Risk Free CDs differ from traditional ones is that you can withdraw from them at any time in case you need money immediately, but they have a higher yield interest rate than a savings account (which these days is close to 0.5%). I know Bank of America has one of these types of CDs, I don't know if credit unions or other banks have it.

If you're absolutely sure of when you're going to withdraw from the account, then you could get a higher interest rate by locking some of the money in higher rate CDs (What @InvestingDoc says above). But if you end up needing the money for an emergency, then you'll pay a penalty which often negates any benefit the higher interest rates have.

There are online savings accounts with higher rates than that. Risk-free cd doesnt make much sense, and nominally the amount "earned" is basically zero so makes little sense to worry too much about it. This money is for school.