Countdown to Financial Fitness: What to do with a Windfall?

Countdown to Financial Fitness: What to do with a Windfall?: My husband’s company gives out bonuses on Valentine’s Day if the previous year was profitable. Since 2019 was one of those years, we’re lo...

What to do with a Windfall?

My husband’s company gives out bonuses on Valentine’s Day if the previous year was profitable. Since 2019 was one of those years, we’re looking forward to the windfall.

Employees have the option of diverting some of their profit-sharing funds to their 401k accounts and/or their health savings accounts (HSAs). Or they can take the whole payout in cash—minus taxes.

This year, the company provided a calculator on their website so employees could estimate how much they’d be receiving and make their elections accordingly. It was interesting to watch how the numbers changed depending upon how much was allocated to the 401k and HSA. Although the amount of the final check decreased, so did the taxes. The more we pledged to put to work in tax-deferred accounts, the larger our piece of the pie.

My husband will eventually have to pay taxes when he withdraws the money from his 401k, but hopefully, the additional earnings from having more invested will make up for it. And as long as we use the HSA funds for medical, dental, or vision care expenses, they will never be taxed.

A lot of people can expect windfalls this time of year. Whether it’s an annual bonus or profit-sharing check from your employer, or a large tax refund from the IRS, it’s nice to see some extra cash. Instead of blowing it, look for ways you can maximize the opportunity to get ahead.

If you can’t put the money into your 401k or HSA, what about funding an IRA (Individual Retirement Arrangement)? Or, if you have children, think about putting something into their college funds or 529 accounts.

Could you retire some debt or shore up your emergency fund? If you’re debt-free and have plenty of reserves, why not invest? (But be sure to research potential investments first rather than just handing your surplus cash to a broker.)

Maybe you’ll want to use the money for a well-deserved vacation. You can pay for it up front rather than charge everything and accumulate more debt.

Or perhaps you need a new car, and the windfall check can be used for a down payment. Maybe you can finally tackle those home repairs you’ve been putting off, or purchase a needed appliance or piece of furniture.

Whatever you decide to do with the money, have a plan. Before you start spending, think about how best it can improve your life.

What would you do with a windfall? I’d love to hear your comments.

For more tips on handling a windfall, read Live Well, Grow Wealth.