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.
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