I have been in a lawsuit against my former boss, who owns the company I was employed at, for sexual harassment and wrongful termination for being fired for reporting it. There was no human resources department. A colleague finally saw a physical incident and provided me with an affidavit and disclosed what he saw in a deposition.
This was October of 2018. The state human rights department did its investigation. Now, the cases are filed against this man and his company in the court system by my attorney.
Long story short, I’ve been informed that if I settle out of court and drop the case, there is a multimillion-dollar amount to expect as per the pending agreement.
I’m not sure I want monetary results. I want him to be held accountable on public record databases. Before I agree, I need advice in terms of what to do with the funds to avoid paying 40% tax.
I have my own small business, and I have ideas of what I may want to do with some of the funding — but I was wondering if you have any information in regards to the following questions:
Where do I put the money to keep it secure and non-taxed until I decide what to do with it — and can I access it when I need it, as opposed to waiting until I am a senior?
What type of industries or realms can I put the money into that will yield me returns on my monthly overhead in the future? Real estate is what people say but that is not specific, and I also see it as a gamble.
-Help a Single Mom Out
Dear Single Mom,
You didn’t ask for advice about whether to accept this settlement. But that part is key. Until you’ve made that decision, discussing investment and tax mitigation strategies is premature. I worry that focusing too much on financial outcomes right now could distract you from figuring out what you really want.
You didn’t ask to be in this awful situation. And you don’t owe anyone anything. It’s not your responsibility to single-handedly hold this man accountable. But think carefully about your emotional health, as well as your financial needs.
How would you feel if other allegations surfaced and you couldn’t speak up? Or if your former boss went on to abuse someone else? In no way are you responsible for his actions, of course. But you have to be comfortable with what you’re gaining and giving up. If possible, take some time to talk through your feelings with a therapist.
The tax bill is an unfortunate reality for sexual harassment survivors — though I’m not sure where the 40% you mention comes from. Whether you reach a settlement or win a lawsuit, Uncle Sam taxes the money the same. Damages related to a physical injury typically aren’t taxable. But if the damages stem from emotional distress, the IRS generally considers it taxable as ordinary income. That applies even if the distress is so severe that it makes you physically sick. (I should note that I’m not an attorney, and there’s a considerable gray area here. It’s essential that you consult with an experienced personal injury attorney.)
So suppose you received a $3 million settlement, and you paid one-third of that in attorney fees. The remaining $2 million would be taxed in ordinary income brackets, which cap out at 37%. Unless you put that money in a tax-advantaged retirement account, you wouldn’t need to wait to access it.
Should you receive a settlement or judgment, proceed with caution. When someone receives a substantial amount of money all at once — whether it’s from a settlement or an inheritance or because you won the lottery — they often feel pressure to make big, life-changing decisions. That can leave you vulnerable to people who don’t have your best interests at heart.
I think the best solution here would be to set aside a year’s worth of expenses in a savings account or certificate of deposit (CD). Then, invest the rest in an S&P 500 index fund for now. That may be a boring solution, but S&P 500 index funds have historically been a great way to build wealth. From there, you can work with a financial advisor to set specific goals and tailor your investments accordingly.
But before you agree to anything, make sure you fully understand all the terms. Ask your attorney lots of questions about what a settlement entails, as well as your options for suing your former boss. If you feel pressured to settle quickly, it’s time to find a new lawyer.
Focus on finding the best course of action for your overall well-being. Money is certainly one component, but it’s not the only factor. There isn’t a right or wrong answer here. This is about figuring out what’s right for you.
Robin Hartill is a certified financial planner and a senior writer at The Penny Hoarder. Send your tricky money questions to [email protected].