Extra Cash? What To Do
With a Windfall…

Any amount of money that you didn’t expect to receive and is over your regular income is considered a cash windfall. Most would consider it to be any amount over $1,000, and quite often, the amount of money is much more than that. This could include but not limited to an inheritance, a bonus at work, a legal settlement, a profit from selling a property or business, or winning the lottery.

Rule of Thumb

Now that you have extra cash, what do you do?

 1. It is never a good idea to rush into anything, such as going on that cruise trip you’ve been dreaming about or buying an expensive sports car or diamond ring when you get a windfall. It is important to know that there are tax considerations to keep in mind when deciding on what to do with the extra cash, as such, discussing your financial situation with a tax and accounting professional is vital. You may owe a significant amount of taxes or no taxes at all, depending on your particular financial situation and how you handle your windfall.

2. We all know that investing in a volatile stock market can be risky. However, 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 the following three options:

>  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 these 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 order, 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.

>  Invest in Tax-Efficient Investment Accounts
Tax-advantage investment accounts include 401(k) retirement plans, 529 education savings plans, health savings accounts (HSAs), and Traditional or Roth 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 or even continue to contribute to your Roth IRA 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.

>  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.

 

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 our office and set up a consultation. You’ll be glad you did.