My 18 year old brother in law recently received $50,000 in a settlement from a car accident. He knows virtually nothing about finance and asked me what I would do with the money if I was in his situation. I'll outline his goals and such in the next few lines, but I was looking for what your input is.

He will be leaving in May for 2 years during which he will need $10,000 (he will be giving service). During those 2 years, he needs somewhere to park the other $40,000 so that when he gets back, he can pay for college. He will need $20,000 for four years worth of tuition (cheap school ). The rest of the money would also be used for school, just not directly (room and board, books, etc.)

My advice (I'm somewhat of a new investor, feel free to critique)
Out of the $40,000 left over ( took out the $10k for service)
Put $10,000 in a Roth IRA (hits 2012 and 2013 contribution limits)
Put tuition $20,000 in a 529 savings plan through his state
Put the other $10,000 in a low cost index/mutual fund (one of the Vanguard funds, mildly aggressive)

What are your ideas/what would you do if you were him??? Thanks for the insight.

Let's play a game, and if I can guess the college, I get all $50k.

Generally speaking, if your brother will be using all $40k for his education, and his education is 5-10 years away, NOTHING should go into the stock market.

Here's my suggestion:

1) Set aside the $10k for his venture into servitude.
2) I actually like the roth IRA idea, as the basis can be used anytime. $10,500 there, "safe" money, perhaps a "high quality"/investment grade bond fund
3) The rest (and you're not going to like this) should go into CD's and/or something like Ibonds.
4) I would have him execute a POA so someone he trusts can make some "moves" for him while he is concentrating on knocking doors. If you do the Bond fund, you would want to try and avoid interest rate risk (but I think that interest rates won't rise until your brother comes back). And/or, you can get him into or out of Ibonds if the rates do rise (no taxes on ibond interest used for education expenses).

I don't like the 529 b/c your brother most likely wouldn't save much b/c his state tax liability is probably pretty low. And it locks the money up into having to be for education expenses.

I like the Roth, and the hope is your brother gets by without having to touch it. But, since you should be in principal preservation mode, it is more or less preserving an opportunity which would otherwise be lost. Once he clears college, he can then shift the funds into more aggressive investments. But the number 1 goal should be graduating debt free (which shouldn't be confused with spending all the money on an "education").

I agree with BF for the most part, but the Roth IRA is a non-starter, since you can only contribute to them with earned income. A car settlement doesn't qualify.

He can use a regular IRA, you can withdraw penalty free for school.

But you realize the value of an IRA can go down. I'd just put it in the highest interest savings you can find, it's only a couple of years.

Nix on the regular IRA as well.

Vintek is correct, you need to have earned income for any IRA. Which shouldn't be out of the norm for the OP's 18 year old BIL.

But, let's say your income is $10k. Your tax liability is almost nothing, so what is the point of deducting it?

Also, education expenses out of IRA's are penalty free, but you will still be hit with taxes coming out for education expenses, which puts us back at the same situation of the Roth IRA, just shifting the tax year. With the flexibility of a Roth, and the likelihood that person in question probably has very little tax liability, the Roth makes much more sense IMO.

Last, you can put your Roth IRA funds into a high interest savings. So while true that one should "...realize the value of an IRA can go down," it doesn't have to be that way either.

I think I agree with BF's core ideas (as I interpret them):
- the money needs to be safe for 2 years
- the tax issues are probably insignificant

Put $10000 in a checking account at a bank that will be accessible for spending over the next 2 years wherever he is doing his mission. Put the remaining $40000 into a certificate of deposit at the same bank. Do not put any money in any bank that is not FDIC insured.

Besides the fact that the $50000 is not earned income and therefore ineligible for any kind of IRA contribution, the tax consequences would be negligible anyway so tax deferral makes no sense.

There is no reason to pay the fees even in a bond fund. A CD will give almost the same return without the fee or hassle.

...or even better, ibonds, which typically do better than CD's (at least these days) and interest is not taxed (although, this would probably be minimal) for education expenses.

I still like the Roth IRA idea if at all possible.

But why? Seriously...why go through the hassle of setting up a roth account and making multiple year contributions for a small fraction of the money? Based on what we know the BIL probably will have almost no taxable income in the next 2-6 years. So there won't be any taxes due to defer. But even if taxable at 15% and if he earns 1% on the money his income is $400 and his taxes are about $60. It hardly seems worth it unless there is more information we don't know about. I can see how a Roth IRA might be better (if available) strictly speaking. But the benefit seems so marginal that I think the simple approach of just banking the money seems better, especially if that checking account has even a small monthly fee that can be avoided by holding the CD.

How I read the situation is this....

The BIL probably won't need ALL the money for his edumacation. By making the contributions now, you are doing 2 things:

1) stuffing money into the Roth at a low tax rate (assumed to be low and possible)
2) As we all know, once these opportunities float down the river, they are gone forever. This is "force saving" at a young age and utilizing an opportunity that is "now" or never. If the basis is ever needed, it will be available tax and penalty free.

IMO, this sets the young man up for 1) being able to graduate debt free and 2) gives him a leg up with money already in the Roth.

A settlement that results in a $50,000 payment directly to an 18 year old tells me the accident was pretty serious. He must have had substantial medical bills or injuries that would likely affect his ability to work.

I would make sure that you are taking into account those factors. Have the injuries shortned his likely career? Or made him less employable in some way? Or will there likely be future medical complications? I'd make sure you are using the money for what it is meant for first- compensation for losses. It's not really a bonus.

$50k is nothing. And this is what is being paid "out," as there are likely medical liens on the settlement that the insurance company is paying off as well.

I got hit by car on my bicycle, and while I was a little banged up and took a few days off work, I was still able to ride a 1200km ride the following month. My settlement, while lower than what is being talked about here, would probably surprise many people. So, $ amount isn't always correlated to your future ability to work. The fact that he is going on a mission would imply he is somewhat OK.

And my settlement went directly into my "investing" accounts. But for an 18yo, I can't imagine a better investment than a college education.

Indeed

I think Starry makes a good point. But spending the money on a college education IS addressing any potential long term medical impacts. A college education, at least these days, is far more likely to qualify a person for a "desk job" that is not as vulnerable to a latent disability later than a more physical job. (yes..not always, not in every case, etc. etc.)

What I meant is if he is obtaining a check (after attorney fees and medical payments) of $50,000, that's probably not a fender bender. This is my line of work. Attorneys take about 1/3 of a settlement. Often a settlement is about 3 times the medical bills + verifiable wage loss. So a $150,000 settlement means $50k for the lawyer, $50k for the medical providers + wage loss and $50k for the injured plaintiff. If he means the settlement is $50k, then he's counting eggs instead of chickens and the amount he'll eventually get will be much less. This is, of course, ball park guesses.

I'm not saying college is a bad plan at all. I guess I just dislike popular idea that a settlement after an injury is a "bonus" or "windfall."

While I certainly looked at my settlement as a "bonus" (I'm finishing my basement), I believe you've created the point in which you're now arguing against (as far as this thread is concerned).