From maximizing his 401(k), to amortizing his mortgage, listen as Scott and Pat advise a lucky caller who just won a huge jackpot!
Scott Hanson: Hi, Chandler.
Chandler: Hi. I recently won a really large jackpot at a casino, and I'm trying to figure out how to lower my tax liability on that. Any advice you might give me?
Pat McClain: Okay. So obviously you've signed the form in there, and have you made any estimated tax payments on this yet?
Chandler: No, it just happened a couple of weeks ago.
Pat McClain: Okay.
Scott Hanson: And how much did you win, ballpark?
Scott Hanson: Wow.
Pat McClain: And are you a big gambler?
Scott Hanson: No one's gonna say that.
Pat McClain: Not in the negative or positive. Do you have gambling losses that you have had this year?
Chandler: Not really.
Scott Hanson: Okay. What kind of work do you do?
Chandler: I'm a manager for a food service company, with my wife and I, our adjusted gross income is about 90.
Scott Hanson: Are you maximizing your 401K contributions?
Chandler: Yeah, well up to 6% because our company matches up to 6%.
Scott Hanson: And how old are you, Chandler?
Scott Hanson: First of all, congratulations on winning the lottery. So one thing you can do is you wanna shove as much money into your 401(k), so ideally if you could wave a magic wand and say, "I'm gonna have a portion of this $172,000 go into a retirement account where I'm gonna get a tax deduction. I won't have to pay taxes on it this year," you would do it in a heartbeat, right?
Pat McClain: But it doesn't work quite that easily. There's no magic wand.
Scott Hanson: So I would go to my employer first thing, and say, "I want to contribute as much as possible even if it means 100% of my salary for the rest of the year into the 401(k) plan."
Pat McClain: And do the same for your wife as well.
Scott Hanson: Because the maximum that you can contribute is $23,000 this year at age 55. So you can contribute $23,000, you're putting 6% of your pay in now, so you're way below that.
Pat McClain: So what this does for you is it immediately takes $30,000 or $40,000 between you and your wife and shelters that from income tax now. So that's the first thing you do.
Scott Hanson: Yes, I would definitely do that.
Pat McClain: You do that Monday morning. Go talk to HR.
Scott Hanson: And Chandler, what's your ballpark family income?
Pat McClain: He said 90.
Scott Hanson: Okay $90,000. So the challenge you've got now is now you add the 172,000 on it. Now you're family income is $260,000. The IRS looks at you and says, "Fat cat." And you pay at higher tax rate. So clearly the most...if you can maximize your contribution to the retirement account, take a tax deduction and a year you're at the highest marginal tax rate you've probably ever been in your life.
Pat McClain: Second thing is, right after you do that, go visit with your accountant and determine the tax liability on that, on your winnings.
Scott Hanson: And most likely you wanna pay your state of California taxes on December 31st.
Pat McClain: So that you get a deduction for the Federal taxes. So you wanna do that now.
Scott Hanson: And some other things for your taxes. If you pay your full property taxes this fall, that's gonna help you. After that there's not...unless you.
Pat McClain: Charitable contributions.
Scott Hanson: You can give money to charity, you can set up, if you said, "Look, I wanna give some portions to charity," you can set it in a donor advise fund and give the funds out in the future. And those are very inexpensive to do. Most of the financial firms can help you with that. And you get a tax deduction for that, so that's another way to lower it. After that...
Scott Hanson: So those are four things you can do.
Pat McClain: ...there's not. After that…
Scott Hanson: There's not.
Pat McClain: Unless if you're self-employed, you could set up a pension plan.
Scott Hanson: But he's not. What else would you do?
Pat McClain: I think that's pretty much it. Do you have other debt out there other than your home mortgage?
Chandler: No, not really. Mostly credit card debt, but I usually pay that off every month.
Pat McClain: Perfect.
Scott Hanson: And what do you owe on your home?
Chandler: About $60,000.
Pat McClain: And what's the interest rate?
Pat McClain: Have you thought about paying that off?
Scott Hanson: I would look at paying down this mortgage or re-amortizing the mortgage, and then keeping that contribution of 16% to your 401(k)s till the day you retire.
Pat McClain: Are either you or your spouse gonna have a pension at retirement?
Chandler: I hope so.
Scott Hanson: Do you work for a university or a city? You worked you said in food service.
Chandler: Yeah, I work for a contract company, so I do not. I do have some TIAA CREF from before I went...
Scott Hanson: I see. You're not gonna have any big pension at retirement.
Pat McClain: And will your spouse have any pension?
Pat McClain: So I would look, I'd meet with the accountant to figure out what the tax liability is. I doubt if you're gonna be able to pay 100% of the mortgage off, but you certainly could pay it down. And then what you do is you re-amortize that mortgage, call the mortgage company and ask if you can re-amortize it, which would lower your house payments.
Scott Hanson: Put the difference in your retirement account.
Pat McClain: And put the difference in the retirement account. And so Chandler, if you were my brother, first of all, I'd say, "Don't gamble anymore." Second of all I'd say, "Congratulations for not taking my advice." Then I would say, "Chandler, this really can be pivotal in terms of the retirement on how you actually manage these dollars."
Scott Hanson: That's right, it really could be.
Pat McClain: And the most important thing for you to figure out is how do you get the maximum in your 401(k) for the remaining years that you have left to work, and this may be the thing that pushes it over the edge. So that's what I would look at.
Scott Hanson: Really, and you're probably in a 25% Federal tax, well this year you're gonna be more, but other years, you're probably in a 25% Federal tax bracket. You're gonna be in a lower tax bracket retirement unless you have some big, fat pension.
Pat McClain: All righty?
Chandler: Will do.
Pat McClain: All right. Appreciate the call. Thanks, Chandler.
Chandler: Thank you.