How to Handle a Financial Windfall Wisely
October 12, 2023 •HoganTaylor Wealth
A financial windfall can be a blessing or a curse, depending on how you manage it. Whether you receive a large inheritance, sell a business, win the lottery, or get a legal settlement, you need to be careful with your sudden wealth. Here are some tips on how to avoid common mistakes and make the most of your windfall, as well as what to expect in terms of taxes.
Don’t Rush Into Anything
One of the worst things you can do with a windfall is to spend it impulsively or recklessly. You may be tempted to buy a luxury car, a mansion, or a yacht, or to lend money to friends and relatives who suddenly show up. You may also be targeted by scammers or fraudsters who want a piece of your pie. To avoid these pitfalls, you should put your windfall in a safe and liquid account, such as a bank or money market account, and let it sit there for at least a month. This will give you time to calm down, think clearly, and plan ahead.
Get Professional Help
Another mistake you can make with a windfall is to try to handle it on your own. A windfall can have significant tax and legal implications that require expert advice. For example, you may owe federal income tax of up to 37% on your windfall, plus state and local taxes, depending on the source and amount of your windfall1. You may also need to update your estate plan, insurance coverage, and investment strategy to reflect your new financial situation. Therefore, you should consult with a certified public accountant (CPA) or tax advisor, a financial planner, and an estate planning attorney who have experience working with clients who have received large windfalls2.
Set Clear Goals
Before you decide what to do with your windfall, you should have a clear vision of what you want to achieve financially and personally. Do you want to retire early, start a new business, travel the world, or support a cause? Do you want to pay off debt, save for college, or buy a home? Do you want to leave a legacy for your family or charity? Having specific and realistic goals will help you prioritize your spending and saving decisions and keep you focused on what matters most to you.
Make It Last
Finally, you should aim to make your windfall last as long as possible. A windfall can be a once-in-a-lifetime opportunity that can change your life for the better if you use it wisely. However, it can also be gone in a flash if you waste it foolishly. Therefore, you should create a budget that balances your current needs and wants with your future goals and dreams. You should also invest your windfall prudently and diversify your portfolio to reduce risk and increase returns over time3. And don’t forget to enjoy your windfall responsibly and share it generously with those who need it.
Reduce Your Taxes
Depending on the type and amount of your windfall, you may face a hefty tax bill at the end of the year. However, there are some ways to reduce your taxes after receiving a windfall. Here are some suggestions:
- Fund an IRA or an HSA. You can lower your taxable income by contributing to a traditional individual retirement account (IRA) or a health savings account (HSA). These accounts offer tax deductions for your contributions and tax-deferred growth for your earnings. For 2023, the maximum contribution limit for an IRA is $6,500 ($7,500 if you’re age 50 or older), and for an HSA is $3,700 ($4,700 if you’re age 55 or older).
- Harvest losses. If you have any investments that are worth less than what you paid for them, you can sell them at a loss and use the loss to offset any capital gains from your windfall or other sources. You can also use up to $3,000 of capital losses to reduce your ordinary income each year and carry forward any excess losses to future years.
- Claim credits and deductions. You may be eligible for various tax credits and deductions that can lower your tax liability. For example, if you use part of your windfall for education expenses, you may qualify for the American Opportunity Tax Credit or the Lifetime Learning Credit. If you use part of your windfall for medical expenses, you may deduct the amount that exceeds 7.5% of your adjusted gross income. If you donate part of your windfall to charity, you may deduct the amount of your contribution, subject to certain limits.
HoganTaylor Wealth can help you manage your financial windfall effectively and efficiently. Contact us today for more information.
HoganTaylor Wealth provides an integrated approach to investment and financial planning and is a registered investment advisor and subsidiary of HoganTaylor LLP. HoganTaylor Wealth takes pride in serving clients as an independent fiduciary through holistic financial planning. Learn more at hogantaylor.com/wealth.
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.