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Retirement & Planning
 

Managing a windfall

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Managing a windfall.

Need help figuring out what to do with a windfall? Learn about windfalls and 10 ways to help maximize yours.

Let us help you manage a windfall.

Sure, you've dreamed of winning the lottery or receiving a huge bonus at work, but have you ever dreamed of how to invest $100,000, or even how to invest $10,000? It may be tempting to buy a new car, or book that dream vacation you’ve always wanted, but it might be better to take your time and consider what else you could do with the money from your windfall.

Schwab is here to help you decide what to do with a large amount of money. Our highly qualified team of Financial Consultants can provide comprehensive investment help and personalized guidance in a way that’s right for you.

A Schwab Financial Consultant can help you:

  • Put the money in a safe, accessible account while you create a longer term investment plan.

  • Assess your current assets and liabilities to decide where your new money should go first (i.e., debt reduction vs. new investments).

  • Review your financial portfolio, adjust your long-term financial strategy, and create an investment plan for your newfound wealth.

  • Decide whether updates are needed to your estate plan; if so, a Financial Consultant may connect you with a Schwab tax, trust, and estate specialist.

  • Determine the tax implications of your windfall and the tax advantages of gifting and charitable giving.

  • Review your insurance needs and consider whether to increase any of your coverage levels.

Windfall definition

A windfall is a large, and many times unexpected, financial gain—often the result of an inheritance, lawsuit settlement, property sale, salary bonus, or even a winning lottery ticket. From an unexpected $1,000 to amounts in the millions, windfalls are more common than you may think. Globally, 69% of retirees plan to leave an average inheritance of $148,000 to their children (in the U.S. the average amount is even higher—$177,000). Many people even give money to their children before they die: About 35% of working-age Americans have already received an average of $24,000 from a family member.1

What to do with a large amount of money:

Being smart about how to invest a windfall could mean an earlier retirement, a more comfortable monthly budget, or even just more peace of mind. So what’s the secret when considering what to do with a windfall? Planning and careful consideration. With a financial plan based on your personal goals, you can ensure your money is not wasted. Below are 10 key steps that can help you maximize your newfound money and put you on more secure financial footing.

  1. Put your windfall funds aside temporarily. Put the money into a relatively safe short-term account (savings account, money market account, or CD) while you determine the best strategy for your windfall. Sitting on the money for a few months can help clear your head of any temptation to spend it, and will help give you the time you need to develop a financially sound plan.

  2. Figure out what you’ll need to pay in taxes. In most cases, you will owe a portion of your windfall in taxes. You’re likely to incur federal and/or state income taxes, capital gains taxes, or estate taxes on your money, which can mean that a substantial portion of your windfall may be going to the government. That’s why it’s important to figure out what you’ll need to pay in taxes right when you receive the money (talk to a CPA or tax specialist if need be), and then set enough money aside so that you don’t run into trouble at tax time.

  3. Eliminate any consumer debt. Pay off any costly, high-interest consumer debt (like credit card debt or student loan debt). Paying interest on debt is money you’re essentially giving away with no benefit to you; plus, a high amount of credit card debt can have a negative impact on your credit score. However, there are certain kinds of debt that may not be beneficial to pay off in full, as they can carry a tax benefit. Interest on mortgages and some student loans can be deducted from your taxes, and if you’re paying a low interest rate on these loans (as are many people who’ve recently refinanced), you may get a better return by keeping this debt and investing your windfall elsewhere.

  4. Make sure you have an emergency fund equivalent to six months of expenses. You never know when you might incur a major medical expense, need a new roof on your home, or get laid off, so make sure these types of potentially costly events don’t ruin your finances. If you don’t already have an emergency fund set aside, create one now. You’ll be glad you did the next time your car breaks down.

  5. Talk to a financial professional. A Financial Consultant can provide a comprehensive review of your finances, help you modify your financial priorities as needed, and craft a strategy for how to invest a windfall that will help you meet your life goals—whether that means paying for your children’s college or retiring early (or both). A Financial Consultant can also help you avoid pitfalls when transferring inherited assets into your name, as some types of assets (such as inherited retirement accounts) have different rules than other types of inherited money. Additionally, a Financial Consultant can also help ensure you’ve got the right insurance coverage, from life insurance to umbrella policies, to make sure you and your loved ones are adequately protected from unforeseen events down the road.

  6. Revisit your portfolio’s asset allocation. If your investment strategy thus far has been to grow your portfolio as much as possible to accumulate wealth, you may want to reassess your growth strategy and shift to one that focuses more on portfolio preservation and buffering against potential market downturns. Changing your portfolio’s asset allocation to have a larger focus on fixed income versus equities will help protect your money against future market volatility. You may also want to consider tax-free investments like municipal bonds,2 which can help reduce future tax payments (especially if you’re now in a higher tax bracket as a result of your windfall).

  7. Decrease your tax liability through charitable giving. You have many options when it comes to giving. You can give directly to a foundation or charity, or invest through a donor-advised fund (which provides an immediate tax benefit). Talk to a Financial Consultant and potentially also to a CPA or estate planning attorney about the pros and cons of charitable-giving vehicles to find the right options for you.

  8. Make sure you’ll have enough money for retirement. Fund your 401(k) or IRA to the maximum annual amount the IRS allows. If you’re over 50 or did not take advantage of the maximum contribution limits in past years, some accounts will even allow you to make catch-up contributions. If you have pre-college-age children, consider investing in 529 plans or other college savings plans to take advantage of tax-deferred growth potential and ease the future burden of college tuition. Qualified distributions from these plans are typically tax-free as well.

  9. Take a portion of the remaining proceeds to fund life or career goals. Make sure you do this after you’ve set aside money for taxes, paid down debt, and devised a strategy to fund your long-term savings accounts.

  10. Treat yourself with some of the money that’s left over. Make a prioritized list of what you’ve always wanted, based on what will bring you and your family the most happiness, and consider investing in some of those items. You only live once, so let the luxury of a windfall help you have some fun while you’re at it.

Let us help you manage a windfall.

Call us at 877-302-5886 or visit your local branch.