"I want to get the most out of my financial windfall, but... what do I need to know?"

Much is written about how to minimize the impact of an unexpected, significant expense or loss of income, and for good reason. This kind of situation can be extremely stressful and upsetting. On the other hand, receiving a large sum of money can also be stressful and perhaps confusing. You may be the beneficiary of an estate, an insurance policy or an RRSP. You may have received substantial proceeds from the sale of your home, from a legal settlement or even lottery winnings. No matter what the source, a large influx of cash can present opportunities and decisions that may have a significant impact on your financial well being.

Choices, choices, choices

This may be a chance to allocate additional funds for your retirement or your child’s post-secondary education, purchase or upgrade a home, pay down debts or address any combination of these or other goals. Consider the potential impact of your options carefully, so you can make the most of this opportunity while avoiding unnecessary pitfalls. First and foremost, the money itself may pose certain financial challenges depending on its source.

Inheritance

If you receive funds from an inheritance be aware that generally, if you keep it in your name only, it would not be subject to division in a separation or divorce agreement. This means that it could not be claimed by your spouse. For most people, the prospect of marital breakdown is remote, but it is an important point nonetheless.

RRSP

If you’ve received funds paid out of a Registered Retirement Savings Plan (RRSP) on which you were a named beneficiary, in most cases you must report the funds as taxable income. The amount of tax payable could be significant, so you should evaluate your tax planning options carefully. For example, you may be able to contribute some or all of the funds to an RRSP, subject to your own unused RRSP contribution room. Any eligible contribution creates a tax deduction you can use to offset some or all of the income received.

Life Insurance or Tax-Free Savings

If you’ve received a payout as a beneficiary from a life insurance death benefit or a Tax Free Savings Account (TFSA), there is no tax on the sum you receive, but it may generate taxable interest or investment income. Consider tax-efficient investment options that may reduce the amount of tax payable as the investment grows. Investment income from capital gains and dividends is taxed at lower rates than interest earned in savings accounts and GICs. You can also contribute the proceeds to your own TFSA, subject to your available contribution room. Investment income earned in a TFSA is not taxable, nor is any amount withdrawn from such a plan.

Making informed decisions will help you maximize your opportunity. Talk to your financial advocate, financial advisor or one of our Certified Financial Planners who will listen to you and provide information, analysis and advice – free of charge with absolutely no strings attached - to help you achieve your goals. We C.U.™ so you can make the best possible choices with your financial windfall.