Question: What's the best way to get a return on a building project?

My wife and I are in the planning stages of a garage project that will net us an apartment to reduce our living expenses when we move in and rent out our home. Not accounting for returns, we can save the funds needed in about two and half years. We're currently trying to figure out where to put this money (the account and fund type). We want something low risk, but with higher returns than a savings account, and tax implications are important. We're considering using three Roth IRAs for this and withdrawing the base to complete the project, leaving the gains in the accounts when we do so. What would you recommend we do with the money?

Response:

Less than three years isn’t a long time to invest with a specific project like yours as a goal. The interest rates on government-insured savings account, short-term certificates of deposit, and Treasury bills are minimal -- at best. Microscopic? Infinitesimal? Still, I don’t think it will prove a reasonable risk to embrace investments that offer the chance of earning a higher return. The risk is that you’ll pay higher fees (eroding the return) and/or embrace greater volatility (you’re savings may be down when you want it). Bottom line: I’d stick with boring, short-term, very safe investments that pay little, guarantee the value of your principal and offer easy access to the money when it’s time to draw it down.

Personally, I wouldn’t bother with the Roth IRAs. I like Roth IRAs. If you can fund them -- even with smaller sums of money -- great. The Roth pays off over a long period of time. For your purposes, however, I don’t think the maneuver is worth it considering the short time span before the money is needed. The IRA accounts probably come with fees and earnings will be microscopic. 

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