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Did you just receive a sizeable amount of settlement money? It’s probably an emotional time for you, but you’re also thinking, “What should I do with all this settlement money?” Cashing in a half a million or a million dollar check can be quite scary and intimidating. Here at District Capital, we work with clients in the same situation. And if you’re in the same boat, read on for our 5 tips on what to do with your settlement money!
We will be discussing the tax implications, where you should keep the money, whether you should consider giving some to your family, how to best invest the funds, and finally, big picture-wise, what to do with your settlement money.
The first question you may have in mind is “is the money taxable?” This really depends on your situation. If it’s a settlement from a personal or physical injury, it’s usually non-taxable. Emotional distress settlement awards are typically non-taxable if the distress is attributable to a physical injury or physical sickness. Car accident injury settlements are usually non-taxable.
What is typically taxable are lawsuits about lost wages or punitive damages, which are damages assessed to punish a defendant. So it really depends on your specific situation. It’s best to consult your lawyer, a tax attorney, or a CPA.
The second question you may ask is, “Where should I keep this settlement money?” While you’re still trying to figure things out, you may want to keep it in your bank account. Now, instead of letting it sit in your checking account and doing nothing, you may consider opening and moving it to a higher yielding savings account, so it can earn a little bit more interest.
Now, after the dust has settled, then you can start thinking about best tax advantaged accounts or strategies to maximize this opportunity. So let me share with you three things that you can consider.
The first one is funding your Roth IRA. If you’re no longer eligible to contribute to your Roth, a backdoor Roth IRA can be another strategy to consider. Roth is a great way to grow a small part of your settlement money tax-free.
Another great way to grow your money tax-free, which not a lot of people know about, is contributing to a health savings account, or an HSA. Now, not everyone is qualified to contribute to an HSA, so make sure you watch our video on HSA versus FSAs to know what’s right for you.
The bulk of your settlement money is probably going to go to a brokerage account, which is the third type of account that you can consider.
Another common question that comes up is, “Should I give money to my family?” Your family members or relatives may not necessarily be in the best financial situation, so I totally understand if you feel the urge to help them out. There is nothing wrong with that. Or maybe they’re financially ok,, but they’ll still come knocking at your door. Maybe your brother-in-law will ask, “Hey, can I have $10,000 to help me buy a truck?” What’s $10,000 compared to half a million or a million dollars that you just received.
While there is nothing wrong with giving, it’s best for you to have a holistic plan first on what to do with your settlement money before making these types of decisions.
To find out tips 4 and 5, visit our settlement money blog.
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Alvin Carlos, CFA, CFP® is passionate about helping middle class professionals make smarter financial decisions. He is the CEO of District Capital Management, a financial planning and investment management firm for the everyday people. Alvin is a CERTIFIED FINANCIAL PLANNER™ practitioner and has a Masters degree in International Relations from SAIS-Johns Hopkins. In his spare time, Alvin enjoys swing dancing and Ultimate Frisbee. He also volunteers for Catholic Charities’ new Financial Stability Network, which helps low-income folks with their finances.
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