What to Do With a Windfall: March 2025 Edition

Windfalls are unexpected and often sudden sources of income. In other words, a stroke of good financial luck. Common examples include receiving an inheritance or bonus and winning the lottery. 

Each year, by late March, millions of Americans have received a windfall from income tax refunds. This year, as a result of the Social Security Fairness Act (SSFA), about three million Americans (myself included) also received a retroactive payment and benefit increase as a result of the elimination of the Windfall Elimination Provision (WEP) and Government Pension Offset (GPO). 

Suffice to say, millions of Americans currently find themselves flush with cash received from income tax refunds and/or SSFA payments. This begs the question: what to do with this money? Below are a dozen solid suggestions to handle a one-time chunk cash:

1. Pay off high-cost debt (e.g., credit card bills and loans) and overdue bills.

2. Start or replenish an emergency fund with a target goal of 3 to 6 months’ essential expenses.

3. Start or increase deposits to tax-deferred employer retirement savings (e.g., a 401(k) plan).

4. Fund a traditional or Roth individual retirement account (IRA). 

5. Start or increase deposits to a 529-college savings plan for children or grandchildren.

6. Make extra principal payments on your mortgage to shorten its term and lower the total interest cost.

7. Invest in your home with improvements that have a high payback, such as landscaping and bathroom or kitchen upgrades.

8. Buy needed “big ticket” items (e.g., furniture, electronics, or a major appliance), for cash instead of using a credit card.

9. Purchase a few hours of a certified financial planner’s time to get advice and a financial check-up.

10. Take action to achieve goals on your “financial bucket list” (e.g., travel and a new car).

11. Invest in your human capital (think certification courses, college classes, and professional conferences).

12. Make gifts to family members and qualified charities.

Also remember that windfalls can have a downside. Lower income windfall recipients can be disqualified for public benefits such as housing subsidies, SNAP, utility assistance, and Marketplace health care plan premium subsidies. 

Higher income recipients could find themselves in a higher tax bracket, paying increased taxes and, for older adults, the IRMAA surcharge on Medicare premiums. 

It is wise to double check your tax withholding for 2025 if you are the recipient of a substantial windfall.

Barbservations From Another “Teaser” Seminar

This is not my first post about attending a seminar or webinar with the stated objective of addressing attendees’ concerns about required minimum distributions (RMDs) and income taxes in retirement. I have gone “undercover” several times before to check out seminar venues as well as the accuracy of content being presented and how well seminars adhere to their marketing messages.

Once again. I was disappointed. A seminar held at my 55+ community targeted me and my fellow residents with a series of Facebook ads. After registering, I received an e-mail confirmation that included this paragraph: “This workshop is not a sales pitch in disguise. Our primary objective is to help you get your questions answered so you can live a healthy and wealthy retirement.” 

Sadly, this was not the case. Within four minutes of the seminar’s start, the presenter started describing his company’s services and encouraging attendees to “come sit down with us” to discuss their finances. He also used the phrase “what we do” at least several dozen times. Below are some additional Barbservations from someone who has been a professional financial educator for 47 years:

Lots of Unexplained Terms- The presenter used many financial terms without explaining them and I wondered if many participants understood what he was saying. Case in point: effective tax rate. He never explained that this is the percentage of tax owed on a person’s total taxable income and is calculated by dividing taxes owed by taxable income (e.g., $7,000 ÷ $50,000 = 14%). 

Very Small Font Sizes- Whether this was intentional or not, the slides that were presented were very difficult to read. Any seasoned financial educator would never make this mistake. I was always taught to follow the 6 x 6 rule when preparing PowerPoint slides: limit each slide to no more than six bullet points and limit each bullet point to no more than six words.

Scary Stories- Designed to get people to hire his company, the presenter told stories about the “widow’s tax” (i.e., the change in tax filing status from married filing jointly to single after a spouse passes away) and the “kiddo’s tax” (i.e., the requirement that non-spouse beneficiaries of tax-deferred retirement savings deplete the account and pay taxes on their inheritance within ten years). The speaker implied that only a financial advisor could help people navigate these challenges.

Correct Information- In between sales pitches were nuggets of solid personal finance information:

• The biggest fear of older adults is running out of money during their lifetime

• Common reasons that people run out of money are taxes, market risk, and long-term care expenses

• Proactively managing taxes is preferable to a passive “I’ll just take my RMD” approach

• If there are things you want to do in life and you have the money, do it now and don’t procrastinate

• Risk tolerance is feelings about investment risk; risk capacity is how much you can afford to lose

• People don’t necessarily need long-term care (LTC) insurance products but they need a LTC plan

• There can sometimes be decades between when people create estate plan documents and when they use them; it is important to review your documents periodically and update them as needed

Tips to Manage Paper Financial Records

With tax season well underway, many people are knee-deep in paper financial records (e.g., W-2s and 1099 forms, receipts, etc.). This makes now a perfect time to review strategies to manage and organize “financial paper.” Below are eight tips that I shared at a recent class:

Create a “Financial One-Stop”-  Designate a central storage area for paper financial records (e.g., bank and brokerage statements, insurance policies, credit card statements, copies of legal documents, Social Security correspondence, copies of tax returns, warranties, and health insurance records). The “one-stop” can be desk drawers, a filing cabinet, or a fireproof lock box. 

Sort and Categorize- File documents in categories such as those listed above and use labeled file folders or accordion files to easily retrieve paper records. There are also a variety of home records organizer kits available for sale online (e.g., Amazon) that include a table of contents, pre-printed tabbed page dividers, and/or a plastic tote box.

Shread Sensitive Data- Use a high quality crosscut shredder that cuts paper into small confetti-like pieces to dispose of sensitive documents that are no longer needed. Examples include old bank, brokerage, and credit card statements and tax returns and supporting documents after seven years. Shredding helps to reduce the risk of identity theft.

Go Digital- Consider changing the settings on financial accounts to request digital statements instead of paper ones, with text notifications every time that a document is ready. In addition, use a scanner to create digital copies of important documents and store them in a cloud server, external hard drive, and/or with trusted people.

Set Up a Schedule- Create a document retention schedule for how long to keep certain documents before shredding them. For example, credit card statements and utility bills for one year and income tax records for seven years. Records related to capital assets (e.g., a house, investments, and valuable collectibles) should be held for as long as you own the capital asset plus seven years. 

Prepare Annual Summaries- Make a master list of month-by-month payments for utilities such as water, sewer, electric, oil, and natural gas before discarding monthly paper statements. The list will provide a useful history of past payments and monthly fluctuations due to weather, water usage, etc.

Handle Your Mail Once- Decide immediately whether something that comes in the mail should be filed, acted upon (e.g., making a payment), or discarded (i.e., in a “circular file” wastebasket or with a shredder). Efficiency experts warn about making paper piles that have revisited later.

Communicate, Communicate, Communicate- Make sure that trusted people are aware of your financial record-keeping system and could access records in an emergency, if needed. This includes knowing how to unlock a locked desk drawer or file cabinet and accessing digital records.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.