My wife has an old insurance policy opened by her parents to which she no longer contributes. The cash value is about $2500.

She is a teacher and has pension benefits through a state system, but thought it might be a good idea to open a supplemental account (IRA?) with this insurance money.

Is this the best way to invest this money? Or should she pay down some of our debt? We do not currently have any credit card balances, but do have a mortgage, student loans and a car loan. We have a few thousand in an emergency fund, plus some savings bonds to fall back on. Some other considerations: 1) we have a newborn and toddler and have started a 529 plan for them and 2) we would like to move to a larger home in 2-3 years.

However we invest, is there a way to avoid paying taxes on this sum?

Any input is much appreciated.

No way to avoid taxes. Once you cash out your policy, you will have to pay income tax on any possible gains. The only way to avoid it is if you lost money on the policy or to rollover to another insurance policy which I don't think you want to do.

And given that you may have to pay taxes on the money, you should consider the opportunity cost of leaving it alone. You can ask this question of any investment you own: Could this money be put to better use, even if I'm penalized for touching it now? If the cash value of the policy is not expected to increase (or perhaps only increase at a very low rate) the answer is most probably yes. By asking this question of EVERY investment (including investments in debt, such as the loans you describe) you should be able to prioritize where your money is best used.

Tinyhands makes a good point it is great that you have no credit card debt, but what kind of rate are you paying on your other debt, You do not want to touch your emergency money but if you are paying anything over 5-6% on your other debt, then paying that down needs to be a priority. If you have a good rate on your mortgage then continue to pay that off as planed and with extra money look to take advantage of any tax free opportunity’s…….does your 401k offer a match if so max that out then move into your IRA accounts, ROTH if you Qualify, the 529 is great but make sure you and your wife have maxed out 401k match and IRA contributions first…

In my opinion, the irritation of having accounts open with a very small balance and little chance of ever increasing in value far outweighs the tax hit from consolidating investments.

My wife had a similar policy that her father opened for her years ago. It had a cash value of something like $3000. For us, it was an easy decision to cash it out and put the money with our other investments. If the value of the policy were substantially greater, we may have given it more thought.

If you qualify for an IRA contribution, and expect to continue to qualify for the foreseeable future, I'd vote for taking the tax hit (which will likely not be that substantial), and moving the money to a Roth IRA. Then continue to fund the IRA in the future.


Sam