Imagine three people who each receive $1 million.
One inherits it from a parent.
One sells a business they spent 30 years building.
One wins it in the lottery.
Each receives the same amount of money. Yet from a financial planning perspective, those three situations may have very little in common.
The amount is the same. The planning considerations often aren't.
Before asking, "What should I do with the money?" a better question may be:
"What planning considerations come with this type of windfall?"
$1 Million From Lottery Winnings
Lottery winnings may be the most recognizable type of financial windfall (albeit one of the least likely), but they provide a good example of why the source of the money matters.
Someone who wins $1 million isn't inheriting assets, selling a business, or liquidating an investment. Instead, they're typically receiving a large cash payment that may be subject to significant federal and, depending on where they live, state income taxes.
Before deciding what to do with the money, it's important to understand how much is left after taxes.
Lottery winners may also face challenges that other windfall recipients don't typically encounter to the same extent, including:
- Tax withholding and estimated tax payments
- Choosing between a lump-sum payment and an annuity (when available)
- Privacy concerns
- Increased exposure to scams and financial fraud
- Requests for financial assistance from friends, family members, and others
For lottery winners, one of the first priorities is understanding the tax impact and developing a plan for managing a large sum of money received all at once.
📌 Learn more - What If You Won the Lottery? How to Handle a Financial Windfall
$1 Million Through an Inheritance
Now imagine you inherit $1 million.
At first glance, that may sound simple. But from a planning perspective, the most important question may not be how much you inherited. It may be what you inherited.
An inheritance may include:
- A traditional IRA
- A Roth IRA
- A taxable investment account
- Real estate
- Business interests
- Life insurance proceeds
- Cash
Each asset comes with its own rules, opportunities, and potential tax implications.
Consider two people who each inherit $1 million. One inherits a traditional IRA. The other inherits a taxable brokerage account. The dollar amount is identical, but the planning considerations may be very different. The inherited IRA may require future distributions that create taxable income, while the brokerage account may receive a step-up in cost basis that affects future capital gains taxes.
Inherited retirement accounts may have distribution requirements, while inherited real estate may raise questions about ownership, maintenance, rental income, or a future sale.
It's also important to remember that inherited investments were built for someone else's financial goals. A portfolio designed for a retired parent or grandparent may not reflect your own income needs, time horizon, or risk tolerance.
With an inheritance, the planning decisions often begin with understanding the assets themselves, not just their value.
📌 Learn more - Inherited IRA Rules for Unmarried Partners
$1 Million Through a Business Sale
Selling a business is about more than converting an asset into cash. For many owners, the business has also been a source of income, a retirement asset, and the primary driver of wealth accumulation for years.
The sale of the business is only part of the decision. Business owners often begin asking questions such as:
- How much may be owed in taxes?
- Can the proceeds replace the income the business once generated?
- How much of the proceeds should remain in cash?
- How should the proceeds be invested?
- How might retirement or other long-term goals change?
For many business owners, planning for life after the sale is just as important as negotiating the sale itself.
📌 Learn more - What Every Business Owner Should Know About Buy-Sell Agreements
$1 Million Through a Severance Package or Legal Settlement
Now consider someone who receives $1 million through a severance package or legal settlement.
Although the dollar amount may be identical, the purpose of the money is very different. A severance package or legal settlement is often intended to address a specific financial need or the impact of a significant life event.
As a result, the planning priorities often include:
- Replacing lost income
- Determining how long the proceeds need to last
- Maintaining healthcare coverage and other employee benefits (when applicable)
- Understanding the tax treatment of the proceeds
- Planning for the next stage of employment or retirement
The focus is often on making sure the proceeds support the financial needs created by the event before making longer-term financial decisions.
$1 Million Through the Sale of Real Estate or Other Appreciated Assets
Finally, imagine receiving $1 million from the sale of investment property, land, a concentrated stock position, or another highly appreciated asset.
Many people naturally focus on the sale price. But from a planning perspective, one of the first questions is often how much will remain after taxes, transaction costs, and other expenses. A property that sells for $1 million doesn't necessarily provide $1 million to put toward future goals.
The planning process often includes questions such as:
- What are the capital gains tax implications?
- How much cash should remain available?
- Does the portfolio need additional diversification?
- Should the proceeds generate income, growth, or both?
- Was the sold asset producing rental income or other cash flow that now needs to be replaced?
Selling the asset isn't the end of the planning process. It's the beginning of a new one. The proceeds may now need to replace the income, growth potential, or other role the asset once served, making reinvestment decisions just as important as the decision to sell.
📌 Learn more - What Are Capital Gains (and When Do You Pay Taxes on Them)
When Should You Seek Guidance After a Financial Windfall?
A financial windfall can create new opportunities, but not all windfalls should be treated the same way.
The amount matters. But so does the source.
Remember the three people from the beginning of this article. Each received $1 million. Yet each faced a completely different set of financial decisions. The amount of the windfall was the same, but the planning considerations were not.
If you've recently experienced a financial windfall or anticipate one in the future, we're here to help. You can schedule a complimentary introductory meeting with our team in Glastonbury or Wilton, CT to discuss your situation and how it fits into your broader financial plan.
Have a quick question instead? Send us a note.
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Jordan Hickey is a CERTIFIED FINANCIAL PLANNER® professional who helps clients create personalized financial plans. Based in Glastonbury and Wilton, CT, Jordan offers guidance on retirement, insurance, investments, and overall wealth management. Schedule a complimentary introductory meeting with Jordan.
This information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete, it is not a statement of all available data necessary for making an investment decision and it does not constitute a recommendation. RMD's are generally subject to federal income tax and may be subject to state taxes. Consult your tax advisor to assess your situation. Any opinions are those of the author, and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.
Contributions to a traditional IRA may be tax-deductible depending on the taxpayer’s income, tax-filing status, and other factors. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty. Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. 401(k) plans are long-term retirement savings vehicles. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty.