Receiving a financial windfall can create as many problems as it can solve. People who get a large amount of money all at once often have a hard time managing it wisely. It happens more often that you might think.

About 20 percent of the people born in years through also known as baby boomers have already received at least one inheritance.

Lump Sum Vs. Annuity

Others suddenly come into a large lump sum of cash from severance pay, bonus, life insurance, the sale of a business or real estate, stock options or even lottery winnings. While most people believe that if they had more money, they would have fewer problems, getting a windfall is not always a way to lessen life's worries.

To avoid some of the common pitfalls, here are a few financial planning pointers:. Some lump sum payments are not subject to income taxes, like tax refunds unless you claimed a deduction for the taxes in prior years , gifts, inheritance and life insurance benefits. Payments for severance, bonus, proceeds from the sale of a business or real estate, lottery or prize winnings, payments from court awards and proceeds from the exercise of stock options, however, are all generally taxable.

Think that one million dollar prize won by game show contestants or that car given by a celebrity to her guests on the talk show is free? Most of these folks are shocked to learn that they must report the value of the prize as income and pay the tax on it in the year it was received.

The taxes alone could be as much as half of the value of the prize. And if you don't pay the tax on time, interest and late payment penalties can amount to another third.

What some people find even more surprising is that non-cash prizes are taxable too. When Oprah gave away Pontiacs to her audience members a few years ago, the winners learned quickly that with prizes, "free" wasn't really "free. The best advice here: Anyone who receives a lump sum payment should first and foremost consult with an accountant or tax attorney. What you need to know is if the payment is taxable, how much are the taxes that will be owed, when the tax must be paid and how much of the lump sum needs to be set aside or reserved to pay these taxes.

Remember, the IRS will not accept "I didn't know I had to pay! One of the first questions asked by people who receive a check for a large sum is, "What do I do with this check? This is to ensure that the funds are cleared and credited into your financial account safely and quickly. Also, some banks may tell you to deposit your money into their insured money market account, or IMMA, as this may currently pay a higher rate of interest. These money market funds, unlike those in brokerage accounts are still insured under the FDIC.

People who receive large, one-time payments should take anywhere from six months to a year before making any long term decisions that involve large amounts of money.

The guideline is that the larger the amount received, the longer the recipient should take to make decisions. This allows for time to think through all available options, some of which can be new and unfamiliar. That's not to say that certain decisions that are clearly beneficial, such as paying off high interest rate debt, should not be done, but avoid bigger financial decisions such as selling a home, quitting a job or making long term investments until some "cooling off" time has passed and all options are carefully considered.

The next step is to check out the interest rate your cash is earning while you are taking time to consider longer-term financial decisions. Check out the interest rates offered by other banks and credit unions. Also check out interest rates at brokerage firm's money market funds and the rates for Treasury bills. Take it slow before you make any investments.

First, increase contributions to retirement plans to the maximum permitted by the plan, make catch-up contributions and contribute to a Roth IRA if allowed.

Next, look to set up and contribute to a college education savings plan for children. Finally, pay off all debts and loans, even pay off your mortgage.

Don't give up control of your money to any investment advisor, even if it's a best friend or family member. Instead, look for a financial advisor who is willing to first educate you about investments and then set up a systematic plan for dollar cost averaging some cash into diversified and low cost investments such as no load mutual funds.

When very large amounts of money are received, don't casually promise to buy anything or give anyone any money. Your new found wealth can be a lightning rod for attracting the attention of family and friends to everything you say or do. If you don't deliver on a promise, you may find yourself on the receiving end of another person's lawsuit, claiming breach of an agreement or contract.

Top Dollars For Your Pension Payments -

It's better to keep your lips zipped about your generous intentions and instead surprise family and friends with your generosity. When suddenly coming into very large amounts of money, you not only have more money but also have more to lose.

Increase your liability coverage by purchasing an excess liability insurance policy and coordinating the coverage with your auto and homeowners policies. Increase your personal property coverage to ensure coverage for any new automobiles, homes and property you purchase. You may also want to consider installing a security system, hiring a security guard for a period of time and even purchasing kidnapping and ransom insurance to protect you and your family from potential risks that come with being very wealthy.

He has appeared regularly as a contributor on the CBS Early Show, CBS NewsPath, as a columnist on CBS Moneywatch. He has also appeared on the Oprah Winfrey Show and is the author of two books. Find out what activities and attractions make these 20 cities and town some of the best places to retire around the world. Generics are a great way to save money in lots of cases, but here is a look at some clear exceptions.

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Investing a lump sum - Money Advice Service

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To avoid some of the common pitfalls, here are a few financial planning pointers: Plan for and pay taxes Some lump sum payments are not subject to income taxes, like tax refunds unless you claimed a deduction for the taxes in prior years , gifts, inheritance and life insurance benefits. Make a safe deposit One of the first questions asked by people who receive a check for a large sum is, "What do I do with this check? Put off big financial decisions People who receive large, one-time payments should take anywhere from six months to a year before making any long term decisions that involve large amounts of money.

Get more interest The next step is to check out the interest rate your cash is earning while you are taking time to consider longer-term financial decisions. Investing carefully Take it slow before you make any investments. Make no promises When very large amounts of money are received, don't casually promise to buy anything or give anyone any money.

Strengthen your safety net When suddenly coming into very large amounts of money, you not only have more money but also have more to lose. An action plan for windfalls Seek professional advice on taxes and legal matters Deposit funds in insured bank accounts to ensure safety Don't make any big financial decisions for at least six months Pay down debts, especially those with higher interest rates such as credit cards Update your liability insurance coverage.

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