Financial Windfalls

Coco Gauff recently made headlines as the 10th teenager to win the Women’s US Open Tennis Tournament, adding a Grand Slam and $3 million to her record. When asked what she would do with her winnings, Gauff replied “Somebody said ‘Pay off my debts.’ I’m 19, I don’t have any debts. I’m not in debt, I live with my parents still.”

This may not resonate with most people as the average U.S. household debt is ~$100,000, and very few people wake up with an extra $3 million in their bank account. However, financial windfalls are more common than one might think: the sale of a business, a gift from family, proceeds from life insurance, the sale of real estate or an unexpected inheritance. If you are fortunate enough to find yourself in this position, what should you do?

Consider the Tax Implications

Not all financial windfalls will result in a tax liability, but many will. Generally, life insurance proceeds aren’t reportable as income, but the sale of a business will have many tax implications to consider. Working with a trusted CPA will help ensure you don’t have any unexpected tax bills. Similarly, an estate attorney can assist with establishing a will or creating trusts to affirm exactly what happens with your new estate. LoneTree collaborates with your “Centers of Influence” to ensure that estate & tax strategies are up to date and in line with your goals.

Create or Increase Emergency Savings

It seems like every month an unexpected expense arises: new tires, medical care, your HVAC goes kaput, etc. Keeping a comfortable amount in an “emergency fund” to cover surprise expenses will provide peace of mind and reduce the likelihood of having to alter your current investment strategy. It’s important to periodically review this number as expenses and obligations change.

Maximize Retirement Accounts

Regardless of which of the various retirement accounts are available to you, taking advantage of the IRS contribution limits can be a key driver in setting yourself up for retirement. With time being the most important variable, tax-deferred growth will help keep more money in your portfolio and enhance the effects of compounding.   

Debt Strategy

Unlike Coco Gauff, most households carry some form of debt. Whether it’s a mortgage, student loans, credit cards, auto loans or all of the above, creating a “debt repayment strategy” will provide a more efficient path to reducing the liability side of the balance sheet. As debts are paid off, the extra cash flow can be used to reduce other debt, fund additional investment strategies or provide a greater margin for everyday expenses.

Open a Taxable Investment Account

After maximizing retirement contributions and/or implementing a repayment strategy, you may be wondering, “What should I do with the rest?” A taxable investment account, commonly referred to as a “brokerage account”, can serve as a means to invest for other future endeavors. Contrary to retirement accounts, which may have early withdrawal penalties, a taxable account provides greater liquidity, meaning it can be accessed at any time. The investment strategy for this account will depend on the time horizon for the goal.

Fund a 529 Account

We recently wrote about the considerations of opening a 529 account for your child(ren). Anyone can open a 529 and anyone can contribute. With contributions growing tax-deferred and distributions being tax-free (if used for qualified education expenses), this can be a great strategy to save for future education expenses. Additionally, starting in 2024, 529 account holders will be able to transfer up to a lifetime limit of $35,000 to a Roth IRA for a beneficiary.

While the above is not a definitive guide on what to do after a financial windfall, they are certainly important considerations. Our team is happy to discuss what might be best for your unique situation. Please This email address is being protected from spambots. You need JavaScript enabled to view it. if you have any questions on this or another piece of your financial life.

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