I am so sorry for your loss.
I wanted to suggest using I Bonds for money you want to keep easily available. They are currently paying 7% interest. The rate resets every 6 months. You can learn more about them
here. You are limited to contributing $10k/yr. I would suggest creating a TreasuryDirect account for your son and buying $10k now and another $10k in January. After one year has passed, this money will be easily available. Anything you expect to need in the next year would need to be held separately.
I think there have been some great suggestions already shared here. Funding a Roth IRA for your son once he has earned income is an excellent idea. And of course using some of this money to fund things that might not otherwise be in the budget, like helping him buy a car, paying for music classes or if he has a different interest, whatever other classes/gear/materials allow him to pursue that. Perhaps taking a vacation right now is what you need. If it feeds your soul, do it. Investing in your well-being and in family bonding at this difficult time could be the best thing you do.
All within reason of course. The bulk of the money I’m assuming you want to invest for his future, which is why you came to this forum. It seems like there are two questions here, how to use this money on your son now while he’s young, to support his growth and development, and how to invest the money for his future. The first question really only you can answer. You’re the expert on your son. But I’m happy to weigh in on the second question.
Since your son is 9, money being put aside for his future will be invested for about 10 years (or more) which to me says you should be investing in the stock market (even more so since you already bought an annuity). I would split that money between a US total stock market fund (like VTSAX) and an international stock market fund (like VTIAX). From my reading, anywhere between 20-40% international seems like the way to go.
I’d probably put a chunk of this money into his 529 – depending on your circumstances. By that I mean, how much are the tax benefits of a 529 worth for you? if you have a 0% capital gains rate, then not nearly as much as for someone with a 23.8% rate, plus 10% state and local taxes on top. Balance that against the risk of paying penalties if you son doesn't have enough qualified education expenses. Remember that the
Kiddie Tax will apply if your son has unearned income (such as from a taxable brokerage account) of more than $2300. Above that amount, your marginal tax rate will be used.
According to
this, as long as your son's unearned income plus half of his social security benefit is under $25,000 his social security survivor's benefit isn't taxed.
If you put $50k into a taxable account at Vanguard, $35k in VTSAX and $15k in VTIAX, going by recent yields it would throw off dividends of ~$800/yr, which keeps you safely within the $1150 exemption for dependents for 2021, and no tax would be owed at all. This scenario even leaves a little room for
capital gains harvesting if you wanted to get into that.
Best of luck with however you decide to handle it. I don’t know you, but just by coming here with these questions, I know you’re an amazing parent trying to do what’s best for your son under difficult circumstances.