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What to Do When You Receive a Financial Windfall

Personal Finance
Man drinking coffee in a robe in his hotel room, enjoying a financial windfall during a vacation

Imagine the thrill of learning you're about to experience a financial windfall (a large, unexpected onetime financial boost). Your imagination will likely rush to all the things you could spend it on — new clothes, a boat, a timeshare — but after a few deep breaths, you may start thinking more realistically. You may find you don't even know what to do with the money to help ensure it has lasting financial benefits.

At the end of the day, however, your goal likely is to put those funds to work in a way you won't regret. Here are some things you can keep in mind while doing so.

What Are Some Tax Implications of a Windfall?

Upon receiving or even just learning about the unexpected funds, the first question you'll want to answer is what the tax consequences, if any, will be. You'll need to know the extent of applicable federal and local taxes so you can determine what funds you'll have left to work with.

Two common sources of a sudden large amount of money — inheritances and a life insurance policy — are generally not subject to federal income tax if under a given value. State income tax and estate tax laws vary by state. If you inherit an asset like stock shares, you could ultimately pay taxes on any gains that occur after the date you inherit the stock. Similarly, if you discover that a family antique is highly valuable and decide to sell it, the proceeds could be taxed at a capital gain tax rate of 28 percent rate.

Winning the lottery, the kind of financial windfall many people dream of, is generally taxed as ordinary income at both the federal and state level. And a large bonus from your employer would also be taxable at both the federal and state level, although taxation could possibly be deferred, depending on the kind of bonus you receive, elections available and what you do with it. It could also be taxed either as ordinary income or at a lower capital gains rate, depending on the form the bonus takes.

Using a Windfall Wisely

Once you've determined what will be left of the windfall after any taxes are paid, you can decide what to do with it. Here are a few things to consider.

Your financial goals: A good place to start may be to consider where you stand in relation to your biggest financial goals, such as saving for retirement or helping your children or grandchildren pay for college.

Alternatively, you could decide to spend some of the windfall right away and add the rest to the funds you've earmarked for your long-term financial goals. For example, suppose you add to your retirement savings. That might help you retire sooner than you'd originally planned, or even retire more comfortably.

Getting back on track: If you haven't recently analyzed your long-term financial goals, and what's required to reach them, that may be a good place to start. If it turns out you're not in line to reach your own goals, perhaps one thing to consider is to use your windfall to help put yourself back on track. A financial representative can help you map out the best way to accomplish that.

Spending the money wisely: If you find that you're on track with your financial goals, congratulations! You may have the freedom to do something special with some of your windfall, whether it be taking a special vacation, making a generous gift to a special charity or contributing to a family member's college savings.

You may also want to consider using some of the windfall to help protect your future. Aside from putting the money toward your retirement or in savings, you may decide to pay ahead on your premiums on an existing permanent life insurance policy.

That's the beauty of receiving a financial windfall: You have lots of good options. The trick is picking the best ones to serve your financial needs and goals.

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Information provided is general and educational in nature, and all products or services discussed may not be provided by Western & Southern Financial Group or its member companies (“the Company”). The information is not intended to be, and should not be construed as, legal or tax advice. The Company does not provide legal or tax advice. Laws of a specific state or laws relevant to a particular situation may affect the applicability, accuracy, or completeness of this information. Federal and state laws and regulations are complex and are subject to change. The Company makes no warranties with regard to the information or results obtained by its use. The Company disclaims any liability arising out of your use of, or reliance on, the information. Consult an attorney or tax advisor regarding your specific legal or tax situation.