Tooele Transcript Bulletin – News in Tooele, Utah

April 21, 2005
What do you do with a financial windfall?

You work hard to provide a good living for yourself and your family. And it may be very important to you to pass on the wealth you’ve accumulated to those who have depended on you.

But what if the shoe was on the other foot, and you found yourself the beneficiary of a sizable financial windfall? Would you know what to do with a large, lump sum payment of cash?

It has been estimated that as much as $10 trillion will pass from one generation to the next over the course of the next two decades. As a result, many people just like you will find themselves in an interesting financial position in the near future. And while it may be tempting to buy that flashy new car you’ve always wanted or fly away on a dream vacation, there are several other important things to consider. After all, resisting the temptation to spend now could prove valuable down the road if you exercise a little discipline and make some good investments.

First and foremost, you may want to take a look at your current debts and see which ones could be paid off right away. For example, far too many Americans are paying double-digit interest rates on sizeable credit card balances. By paying down — or eliminating altogether — a high-interest credit card balance, you are in effect paying yourself a double-digit return. You’d have to look long and hard to find another investment that would pay as well.

And once you have that debt paid off, you can put your money into investments that will actually be paying you back.

Another important consideration is the status of your retirement funding. It would be a shame to spend away a large sum of money now, only to find yourself needing more cash when you want to stop working for good.

Unfortunately, many people underestimate the amount of money it will take for them to retire. Contribution limits for many employer-sponsored retirement plans allow for substantial investments, and you can also set up your own Individual Retirement Account beyond what you have available through your work.

Saving or investing a considerable portion of any inheritance can benefit you in the future. In addition to spending on your own wants and/or needs, you may want to consider setting aside a portion of any extra money you receive to go to your dependents. One thing that would certainly benefit future generations is creating an education savings account for your children or grandchildren. The government even provides you with several tax incentives to do so.

Two of the more popular college savings vehicles are 529 plans and Coverdell Education Savings Accounts. While they vary greatly in contribution limits, both of these savings vehicles allow you to invest the money with the earnings on those investments accumulating federal income tax-deferred. As long as you take that money out to pay for qualified education expenses, your distributions will be federal income tax-free1. In addition, depending on which plan you choose, you might be able to take advantage of state tax benefits as well.

Keep in mind, an investment in a 529 plan will fluctuate such that an investor’s shares when redeemed may be worth more or less than the original investment. There is no guarantee that an account will grow enough to cover higher education expenses. All 529 plans have various fees and expenses. Before investing in a 529 plan, be sure to read the plan’s offering document carefully for more information on fees, charges and expenses.

Regardless of what you choose to do with any windfall you receive, the important thing to remember is that you should carefully plan what you will do with the money so as not to lose any on frivolous pursuits. You could probably benefit from a discussion with your tax consultant and your financial consultant to explore your options further.

Kenyon Eastin lives in Stansbury Park He is an Accredited Asset Management Specialist with A.G. Edwards & Sons, Inc. in the Sugarhouse office in Salt Lake City. This article was provided by A.G. Edwards & Sons, Inc., Member SIPC.

A.G. Edwards does not offer legal or tax advice. Be sure to consult with your tax or legal advisor before implementing any plan.

* Distributions from 529 plans used for qualified education expenses are federal income tax-free through December 31, 2010. Under current law, starting on January 1, 2011, all distributions of earnings from 529 plans will be taxable regardless of the type of expense.

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