What to do with Windfall

[street]

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

 

[USGrant1962]

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

 

[Surewhitey]

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...

 

[f35phixer]

+1 Maybe a 529 if kids are a factor.

 

[street]

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.

 

[savory]

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.

 

[audreyh1]

Do they already have a plan?

 

[Sunset]

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 ?

 

[street]

+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.

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.

 

[ivinsfan]

I thought they would be drilling a well I didn't think they allowed pulli ng water from bodies of water. Interesting

 

[pacergal]

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)

 

[SecondCor521]

https://www.bogleheads.org/wiki/Managing_a_windfall is probably a good resource.

 

[38Chevy454]

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.

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.

 

[djsander]

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.

 

[street]

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.

 

[street]

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

 

[GravitySucks]

Enjoy some of it before they’re old.

 

[street]

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?

 

[pacergal]

If that debt bothers them, then yes.

 

[USGrant1962]

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.

 

[street]

Not when you can get 4%+ in a money market account.

Thanks again, and that is the way I think about too. I have always been for paying off debt. It worked great for when I paid off my home when I was 30 years old. I had a lot of years to invest because I had no mortgage.

Yes, like Pacergal said, it is what they want to do.

 

[Ronstar]

Like others, I would suggest pay taxes, pay off non mtge debt if any, set up 529 college fund and/or an equity index fund.

Congrats to your son! and hopefully the water buyer will need more in the future.

 

[street]

Like others, I would suggest pay taxes, pay off non mtge debt if any, set up 529 college fund and/or an equity index fund.

Congrats to your son! and hopefully the water buyer will need more in the future.

I'm very happy for them also. It sure will give them an added bust in life if they plan it out.

Thanks

 

[USGrant1962]

In case you didn't know, 529 accounts can be funded lump sum for up to 5 years of gift tax exclusion, called gift tax averaging. So $80K can go in in a lump. My mom funded our kids that way many years ago.

Here's one article that discusses it: https://www.savingforcollege.com/article/10-rules-for-superfunding-a-529-plan

 

[street]

In case you didn't know, 529 accounts can be funded lump sum for up to 5 years of gift tax exclusion, called gift tax averaging. So $80K can go in in a lump. My mom funded our kids that way many years ago.

Here's one article that discusses it: https://www.savingforcollege.com/article/10-rules-for-superfunding-a-529-plan

Outstanding information. I will pass this along to him and he can look into this option.

Thank You!!