Got Cash? What To Do With a Windfall

Aug 2, 2022 | Individuals, Newsletter, Tax

A cash windfall is any amount of money that you didn’t expect to receive and is over your regular income. Most would consider it to be any amount over $1,000 – and quite often, the amount of money is much more than that. For example, you may have received a bonus at work, an inheritance, a legal settlement, a profit from selling a property or business, or won the lottery.

The first thing to remember is that it is never a good idea to rush into anything, such as going on that safari trip you’ve been dreaming about or buying an expensive sports car or diamond jewelry. There are also tax considerations, so discussing your financial situation with a tax and accounting professional is vital. You may owe a significant amount of taxes – or no tax at all, depending on your particular financial situation and how you handle your windfall.

Investing in a volatile stock market can be risky. Furthermore, with the current inflation rate hovering around 9 percent and the national interest rate for savings accounts averaging 0.11 percent (BankRate.com), holding money in a cash savings account means that you are losing money. With this in mind, if you’ve received a cash windfall recently, consider these three options:

1. Get Your Personal Finances in Order

If your personal finances aren’t in order, then now is the time to use your cash windfall to build an emergency fund, pay off high interest and credit card debt, and pay off a mortgage or put a down payment on a home or investment property (after due diligence, of course). While doing any of those is not as much fun as spending money on a fancy vacation, it will pay off in the long run.

Once your financial situation is in good standing, allocate 10 percent of any money left over toward something “fun.” If you have money left over after that – or already have your financial house in order, consider one of the next two options.

2. Invest in Tax-Efficient Investment Accounts

Tax-advantage investment accounts include 401(k) retirement plans, 529 education savings plans, health savings accounts (HSAs), and IRAs. Investing in these types of accounts could lower your tax bill now, but keep in mind that if you need the money sooner rather than later, you may need to pay penalties and taxes.

Which tax-efficient investment accounts to contribute to depends on your financial situation. If you are retired, you can no longer contribute to a 401(k), but if you have grandchildren, you can contribute to a 529 education plan. If you are still in the workforce and your employer offers a high-deductible health plan, consider maximizing your 401(k) contributions if you aren’t already doing so, as well as contributing to an HSA to help pay for healthcare-related expenses you might incur now or in the future.

3. Buy Treasury I-Bonds

I-Bonds are U.S. savings bonds issued by the United States Treasury. The interest rate is adjusted every six months, in May and November. Currently, I-Bonds purchased through November 2022 are paying 9.62% on an annual basis for the first six months they’re held. The interest rate will be adjusted in November based on inflation.

Individuals purchase I-Bonds from Treasury Direct. There is a maximum of $10,000 per person per year (each spouse can purchase $10,000 for a total of $20,000). The minimum age for purchasing these bonds is age 24, but parents can gift the bonds to their children (age 18 and under).

I-Bonds must be held for a minimum of one year; if redeemed before five years, three months of interest is forfeited. Interest income is exempt from state and local taxes but is subject to federal tax – unless the bonds are used to pay for qualified education expenses.

Help is Just a Phone Call Away

If you’ve received a substantial cash influx, take a deep breath, don’t make any quick decisions, then carefully consider your next steps. If you need assistance managing your cash windfall, don’t hesitate to contact the office and set up a consultation. You’ll be glad you did.

Tax Season Cleanup: Which Records Can You Toss?

Tax Season Cleanup: Which Records Can You Toss?

If you’ve filed your 2024 tax return, you may be eager to do some spring cleaning, starting with tax-related paper and digital clutter. The documentation needed to support a tax return may include receipts, bank and investment account statements, K-1s, W-2s, and...

Payroll Fraud Threats Inside and Outside Your Company

Payroll Fraud Threats Inside and Outside Your Company

Payroll fraud schemes can be costly. According to a 2024 Association of Certified Fraud Examiners (ACFE) study, the median loss generated by payroll fraud incidents is $50,000. It’s essential to know the payroll schemes making the rounds and how to prevent them or at...

The Tax Side of Gambling

The Tax Side of Gambling

Whether you’re a casual or professional gambler, your winnings are taxable. However, the Treasury Inspector General for Tax Administration reports that gambling income is vastly underreported. Failing to report winnings accurately can lead to back taxes, interest and...

Stuck in the Middle: The Sandwich Generation

Stuck in the Middle: The Sandwich Generation

The term “sandwich generation” was coined to describe baby boomers caught between caring for their aging parents and their children. Today, it most commonly applies to Generation Xers and older Millennials. If you’re caught in the middle, it might be time for honest...