Turning Windfalls Into Wealth Enhancement ... Financial Advisor Offers 5 Ideas

When you receive a surplus of some sort – money beyond and above what you usually have – the all-too-human tendency is to basically say “whee!” and spend it. That can arise from a cash inheritance, a tax return refund or any similar situation where cash arrives in your (virtual) mailbox or checking account that’s more than you’re used to. Even the pandemic may have inadvertently resulted in a surplus for you, if you’ve worked from home rather than spending money on a commute, for instance.

However, instead of saying “whee!” and spending the money, make a plan to maximize your “gift.” If you’ve ever wished you could save more for retirement, for example, or have a bigger savings account for emergencies, now may be the time.

At Linscomb & Williams, we often help clients create a plan for inheritances, tax refunds and bonuses. From our 50 years of experience in working with families, we want you to consider 5 other ways you can use your windfall – and reasons why you should.

Retirement Plans

Roughly 70 percent of Americans worry that they won’t have enough saved for retirement. If that’s you, a surplus presents a big opportunity to not only alleviate some of that anxiety, but to do your future self a big favor.

Money invested in a pre-tax retirement account like a Traditional Individual Retirement Account (IRA) grows tax-free until you withdraw it at retirement. IRA contributions are tax-deductible in the year of contribution. If you receive an unexpected windfall of $6,000 or $7,000, remember that you can put up to $6,000 toward retirement every year in an IRA ($7,000 if you’re 50 or over). 

Better yet, contributions made to employer retirement plans like 401(k)s are often matched. In this case, your bonus money can be even more of a bump if your employer will give you the same amount for saving it.

 

Are you saving enough for retirement? Schedule a no-obligation conversation with the team at Linscomb & Williams.

 

Emergency Savings Reserve

Further, according to reports, roughly 40 percent of Americans don’t have enough saved for a $400 emergency, like a sudden car repair or emergency trip to the doctor. Of those who do have savings, 56 percent have $5,000 or less, and about 33 percent have $1,000 or less.

Those figures are usually not enough to cover a serious emergency expenditure. If you suffer a job loss, say, or a medical issue that curtails your ability to earn, or even a major car repair, you could be in trouble. What if you were affected by a natural disaster?

If your current emergency fund doesn’t have three to six months’ of your normal living expenses covered – or if you don’t have an emergency fund at all – setting your windfall money aside for these types of situations will be beneficial. Savings accounts currently garner a very low rate of interest, so you won’t make big returns on the money you put away. However, the peace of mind you feel by having a back-up-plan can be worth it.

Debt Paydown

Americans currently hold near-record amounts of debt. While some debt is necessary – few people could afford buying a home without taking on a mortgage, and a mortgage allows you to build equity and affords tax advantages – large amounts of debt mean large amounts of debt payments every month. If you have a lot of debt, a majority of your disposable income may be passing through your hands to be handed over to creditors every month. That can leave you little money to put toward retirement, saving for a home down payment, or used for short-term goals.

Debt paydown is one more way your windfall money can have a big effect.

There are several methods to paying off debt. Talk to a financial advisor about what makes the most sense for you.

Charity/Gifts

Don’t overlook the benefits of putting an inheritance toward charity and/or gifts!

First, charitable giving and helping your loved ones can bring a warm glow to your heart and needed help to many worthy causes.

Second, giving to others can yield tangible financial benefits for you. Charitable giving is tax-deductible up to certain amounts set by the Internal Revenue Service, as long as you give it to an IRS-approved organization.

You can also give cash gifts to family members without incurring tax on the money, as long as the cash is $15,000 or less per year. That’s $15,000 per recipient, so if you want to give cash to your daughter to help with her student loans and to your son to put toward medical school tuition, you can give both of them up to $15,000 free of gift taxes, each and every year. And moreover, they pay no income tax for receiving these gifts.

Giving to others can be tricky though, so make sure you discuss your plans with a financial advisor to avoid any surprises later on.

Estate Plans

Another strategy is to earmark the money as part of your own estate plan – maybe earmark a portion for your grandchildren or invest the money in an educational savings plan. You may even want to jointly invest the money in stocks and watch it grow with your grandchildren, with the understanding that the stocks will eventually be solely in the grandchild’s care. This can be a helpful way to teach your grandchildren about financial planning and show them a real-life example of how it works. This gives you the opportunity to teach them about different types of equities available, dividends, compound interest and market volatility, to name a few.

These are just a few ideas. There are multiple strategies when it comes to incorporating a windfall into your estate plan.

The Takeaway

Even if you plan to spend some of your windfall money in the end on something you’ve been wanting for a long time, discuss your plans with a financial advisor first. There may be ways to do it that are more beneficial that you may not be aware of.

Linscomb & Williams is a fee-only, fiduciary financial planning and investment management firm headquartered in Houston, Texas and serves clients nationwide. We have nearly half a century of experience helping families build, preserve and manage wealth. If you’re looking for guidance on what to do with an inheritance or other windfall of money, let’s talk. The Linscomb & Williams team is here to help.

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Carolyn Galfione, CPA, CFP®

Carolyn Galfione, CPA, CFP®

Carolyn Galfione is the Managing Director and a Wealth Advisor at Linscomb & Williams.

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