Receiving a sudden and sizable influx of cash may seem like a dream come true. It can easily turn into a nightmare for your financial well - being. This article suggests some common-sense tips on creating a sensible, long-term plan.
Risky conditions
An obvious example is the temptation to immediately buy an expensive new car or home. Fraudulent charities may come knocking. Forgotten friends, long distance family or casual acquaintances can also find needs for your new-found wealth. Avoid these potential pitfalls by stashing your windfall in a bank or money market account as soon as you receive it. Before committing funds, identify a few specific, reasonable goals — such as funding your retirement, paying off your debt or establishing an account to fund a child or grandchild’s education. Waiting at least a month before you touch the money can help prevent impulse buys and other mistakes. Don’t quit until you can quantify the change to your budget and lifestyle.
Also, you will owe taxes. Some windfalls, such as lottery winnings and certain legal settlements, are subject to federal tax — as much as 37% federal tax if your windfall pushes you into the top income tax bracket. State and local taxes may apply as well. A tax professional can help you determine what you owe.
Shelter from the storm
What you eventually decide to do with your windfall depends on many factors. If you have certain types of debt, you’ll probably want to pay it off ― especially if it carries a high interest rate and the interest isn’t deductible. Also, establishing or boosting your emergency savings can minimize the need to incur future debt.
Next, consider where you’d like to be five, 10 or 20 years into the future. Develop a budget to help you move toward your goals — retiring early, starting a business or something else.
Long-term plan
A final word of warning: Be careful when asked for money. Friends and family members may expect to share in your bounty or may pitch “sure-fire” investment opportunities. We can help you formulate a long-term plan to put a windfall to optimal use.
The HoganTaylor Tax Practice
If you have any questions about the content of this publication, or if you would like more information about HoganTaylor's Tax practice, please email Tony Otto, Tax Practice Lead, at jotto@hogantaylor.com. You may also contact Denise Felber, Tax Partner, at dfelber@hogantaylor.com
INFORMATIONAL PURPOSE ONLY. This content is for informational purposes only. This content does not constitute professional advice and should not be relied upon by you or any third party, including to operate or promote your business, secure financing or capital in any form, obtain any regulatory or governmental approvals, or otherwise be used in connection with procuring services or other benefits from any entity. Before making any decision or taking any action, you should consult with professional advisors.
