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What to do with Windfall
Old 01-20-2023, 08:22 AM   #1
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What to do with Windfall

I wanted to share some news my son/wife received yesterday. My son was approached by a water transport company a month ago (reliable well-known national company) about buying water from him and to cross his land. In this area there is some oil activity, and they will need water for a new well.

So, yesterday he signed the agreement to the deal and offer. The amount will be in the neighborhood of 200K plus, with work starting in April and will be paid about a month after work is done. Work will about 3 weeks or so.

Both him and his wife have high income professional careers and one even with a pension. I don't know their finances, but they should be doing very well.

My question is if you are a mid-age 30-year-old how would you manage this windfall of money? It is also a very real possibility that they could use and buy more water from him again in the future.

Note: I would never tell or ask this question to any other than you people here. It is nothing to spread around. I have never directed or steered my son in any financial direction and may not even with the advice and opinions you give me. If he would ask, I would be ready for your answers you offer me.

Thanks
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Old 01-20-2023, 08:30 AM   #2
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Well that's good news. It is hard to answer without knowing much about their finances but a good approach would be:

1. Pay the taxes on it! So they probably really have $150K
2. Pay off any non-mortgage debt (credit cards, car loans, school loans)
3. Invest the rest in a total market index fund
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Old 01-20-2023, 08:50 AM   #3
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Well that's good news. It is hard to answer without knowing much about their finances but a good approach would be:

1. Pay the taxes on it! So they probably really have $150K
2. Pay off any non-mortgage debt (credit cards, car loans, school loans)
3. Invest the rest in a total market index fund
I like this, just add to maximize tax deferred accounts to minimize the additional taxes as they're likely in the 24%+ rates. 401ks, HSA, etc.

Maybe a 529 if kids are a factor.

Can they set up a S-Corp and count most as dividends & open a Sep401k? Increases the 401k limits to like $66k each. I could be wrong about this...
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Old 01-20-2023, 09:31 AM   #4
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+1 Maybe a 529 if kids are a factor.
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Old 01-20-2023, 09:35 AM   #5
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I like this, just add to maximize tax deferred accounts to minimize the additional taxes as they're likely in the 24%+ rates. 401ks, HSA, etc.

Maybe a 529 if kids are a factor.

Can they set up a S-Corp and count most as dividends & open a Sep401k? Increases the 401k limits to like $66k each. I could be wrong about this...


Now that is an interesting option! I will learn about that.

USGrant1962 >> Thanks for your input. I do know she has some student loan yet she was paying off. Their home mortgage is ~2.5 interest rate.
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Old 01-20-2023, 10:23 AM   #6
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I would sit down with Firecalc and other calculators and complete or change their current plan for their FIRE date. That might include things like the 529 etc. I also might do the calculation with and without the after tax income to demonstrate the impact.

This might also help with the various returns and risks they maybe taking with investment options, especially as it relates to financial independence.
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Old 01-20-2023, 10:30 AM   #7
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Do they already have a plan?
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Old 01-20-2023, 11:51 AM   #8
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Originally Posted by USGrant1962 View Post
Well that's good news. It is hard to answer without knowing much about their finances but a good approach would be:

1. Pay the taxes on it! So they probably really have $150K
2. Pay off any non-mortgage debt (credit cards, car loans, school loans)
3. Invest the rest in a total market index fund
+1
Good advice.

I'm amazed $200K for water, must be a lot of water and trucks. Will the water come from a lake or well ?
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Old 01-20-2023, 12:58 PM   #9
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+1
Good advice.

I'm amazed $200K for water, must be a lot of water and trucks. Will the water come from a lake or well ?
From the river that goes through his land.


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Do they already have a plan?
I don't know that they do or not. I would hope they have a plan for how they want to use or invest that money. I do know if I would have had a windfall at his age it would of went into the markets. I'm not sure if he would do that or not.
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Old 01-20-2023, 01:25 PM   #10
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I thought they would be drilling a well I didn't think they allowed pulli ng water from bodies of water. Interesting
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Old 01-20-2023, 01:51 PM   #11
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Congratulations to your DS.

My advice ( if they asked):
Taxes
Debt
College funds for kids (if I remember they have one and another soon on the way)
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Old 01-20-2023, 02:26 PM   #12
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https://www.bogleheads.org/wiki/Managing_a_windfall is probably a good resource.
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Old 01-20-2023, 02:46 PM   #13
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Originally Posted by Surewhitey View Post
I like this, just add to maximize tax deferred accounts to minimize the additional taxes as they're likely in the 24%+ rates. 401ks, HSA, etc.

Maybe a 529 if kids are a factor.

Can they set up a S-Corp and count most as dividends & open a Sep401k? Increases the 401k limits to like $66k each. I could be wrong about this...
I think "Street's Kid Water Corp" is potentially a very good idea, to put approx 2/3 of the potential income money in pretax. Then convert to Roth and use the extra cash to pay the Roth conversion taxes due. Result is ~$130K boost to Roth, with almost no out of pocket.

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Congratulations to your DS.

My advice ( if they asked):
Taxes
Debt
College funds for kids (if I remember they have one and another soon on the way)
Or if not doing the S-Corp, above is the order of using the funds that seems financially sound. Leaving a 2.5% mortgage may make sense, but it would certainly make a nice reduction in time for a paid off house.
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Old 01-20-2023, 04:02 PM   #14
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I thought they would be drilling a well I didn't think they allowed pulli ng water from bodies of water. Interesting
Typically surface water usage requires various permits. The other item is if there are water rights involved how much can be drawn and by whom. I would think the person doing the withdrawals have researched all this. But, they maybe getting in and getting out. Read the contracts really well before signing, have a lawyer review if you don’t understand everything. Make sure it is an attorney with O&G and land background. If they are using or installing roads possibly look to prepaid damages and a percentage of the estimated water in advance. I worked in the pipeline industry we sold water from one of our ponds on a site the company owned. There are a lot of things to consider beyond the $$$. Most of the cop pants involved in this have boiler plate contracts, but this kind of money you need to watch out.
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Old 01-20-2023, 04:27 PM   #15
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Typically surface water usage requires various permits. The other item is if there are water rights involved how much can be drawn and by whom. I would think the person doing the withdrawals have researched all this. But, they maybe getting in and getting out. Read the contracts really well before signing, have a lawyer review if you don’t understand everything. Make sure it is an attorney with O&G and land background. If they are using or installing roads possibly look to prepaid damages and a percentage of the estimated water in advance. I worked in the pipeline industry we sold water from one of our ponds on a site the company owned. There are a lot of things to consider beyond the $$$. Most of the cop pants involved in this have boiler plate contracts, but this kind of money you need to watch out.
I agree whole heartedly!! My son is a very careful in doing anything and has done his homework. Yes, all permits are in place and this procedure is done a lot in this area. His wife is an attorney and was involved in the process.

I had a company many years ago wanted to do the something, but the terrain wasn't going to work for them, so they found a different source.
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Old 01-20-2023, 04:31 PM   #16
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I think "Street's Kid Water Corp" is potentially a very good idea, to put approx 2/3 of the potential income money in pretax. Then convert to Roth and use the extra cash to pay the Roth conversion taxes due. Result is ~$130K boost to Roth, with almost no out of pocket.
I really like that idea. I may have to suggest that in an around about way. Lol
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Old 01-21-2023, 02:51 PM   #17
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Old 01-22-2023, 08:01 AM   #18
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So, with a low mortgage rate of ~2.5% and not knowing what they owe on the home.

Would paying off the mortgage be a good idea at their mid thirty age?
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Old 01-22-2023, 08:17 AM   #19
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If that debt bothers them, then yes.
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Old 01-22-2023, 10:18 AM   #20
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So, with a low mortgage rate of ~2.5% and not knowing what they owe on the home.

Would paying off the mortgage be a good idea at their mid thirty age?
Not when you can get 4%+ in a money market account.
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