Windfalls and Pay Increases for 403(b) Participants
May 17, 2025
By Barbara O'Neill, CFP®, AFC®
A windfall is an unexpected, often sudden, source of income that is generally received without any prior planning or effort. While large lottery winnings and unanticipated inheritances often come to mind, there are other types of windfalls that are more modest and commonplace. Think income tax refunds and small prizes.
This post is about three types of windfalls that affect 403(b) participants: income tax refunds, Social Security Fairness Act (SSFA) benefits, and/or retroactive pay received as a result of delayed contract negotiations. The last two are also associated with an increase in income. For me, the SSFA raised my monthly benefit by $550.
The April 15 tax filing deadline for 2024 income taxes has passed. As a result, many Americans are receiving tax refunds. In late March, the average individual tax refund was about $3,221 according to the Internal Revenue Service (IRS). In 2024, almost two-thirds (64%) of taxpayers received refunds for overpaying taxes.
Earlier this year, as a result of the SSFA, over three million Americans (myself included) received retroactive payments and benefit increases as a result of the elimination of the Windfall Elimination Provision (WEP) and Government Pension Offset (GPO). Many are 403(b) participants who worked in jobs that were not covered by Social Security.
This post describes 20 good uses of retroactive pay and/or an increase in pay. They are grouped into four categories: financial planning, saving and investing, philanthropy, and spending. Also included is a summary of research about planned uses of windfalls. It concludes with three “need to know” facts, and six take-away action steps.
Windfall Strategies: Financial Planning
#1- Pay Off Debt — Use extra money to pay off outstanding balances on loans, credit cards, medical bills, or other debt. Two ways to do this are the avalanche method, where you pay extra on high-interest debt, and the snowball method, where you apply extra payments to debts from smallest balance to largest regardless of their interest rates. A free resource to create a personal debt reduction calendar is the Utah State University website, PowerPay.
#2- Prepay Mortgage Principal — Consider using extra money to prepay mortgage principal (or pay off your mortgage) so your house is “free and clear” in retirement. This makes the most sense if your mortgage has a high interest rate. Prepaying principal can save a significant amount over the life of the loan. If you have a low interest rate, you might be better off investing extra funds elsewhere. Use a mortgage prepayment calculator to see what you could save.
#3- Hire a Financial Advisor — Consider hiring a financial planner and/or tax advisor if your windfall is significant. One former colleague received $31,000 in retroactive Social Security benefits! This is enough to change a tax bracket, raise income taxes substantially, and possibly trigger Medicare IRMAA surcharges and the net investment income tax.
#4- Build Human Capital — Fund opportunities to build skills, knowledge, and experiences that enhance your ability to perform tasks, solve problems, and create value in the workplace or society. Think certification programs, college courses and degrees, professional conferences, technical/computer training, and internships.
#5- Prepay a Funeral or Cremation — Give the gift of a preplanned and prepaid funeral or cremation to loved ones. Knowing that your final expenses are paid for can give you and your family peace of mind. You can rest assured that your final wishes will be respected and your loved ones won't have to worry about the financial burden or logistics.
#6- Upgrade Insurance — Check with your insurance agent regarding “holes” in your coverage. For example, you may have built enough wealth to need an umbrella liability policy or may need to raise policy limits on your insurance to ensure coverage for larger claims. Other possible insurance upgrades are sinkhole riders and flood insurance.
Windfall Strategies: Saving and Investing
#7- Build an Emergency Fund — Aim to set aside 3 to 6 months' worth of living expenses in an easily accessible account (e.g., high-yield savings account or money market fund) to ensure you can cover unforeseen expenses without relying on credit cards or loans. An adequate emergency fund provides a sense of security and reduces financial stress.
#8- Increase Retirement Plan Savings — Consider increasing 403(b) plan contributions whenever you receive a raise, up to the maximum amount allowed by the IRS ($23,500 under age 50 and $31,000 age 50+). An extra $100 in monthly savings over 30 years with a 6% return can grow to almost $100,000. Try a savings calculator to see for yourself.
#9- Fund an IRA — Start or fund an existing individual retirement account (IRA) up to the maximum amount allowed annually by the IRS ($7,000 under age 50 and $8,000 age 50+). A Roth IRA is funded with after-tax dollars and qualified withdrawals (including earnings) are tax-free. A traditional IRA has tax-deductible contributions, but withdrawals are taxed as ordinary income.
#10- Save for Education — Start or increase deposits to a state-run 529 savings plan to help fund college or trade school for children or grandchildren. Anyone can open a 529 account and make contributions, regardless of income. Contribution limits vary by state and many states offer tax deductions or credits for contributions.
#11- Invest in a Taxable Account — Consider a standard investment account that does not offer special tax advantages like a 529 plan or retirement accounts. For example, brokerage accounts holding stocks and bonds or mutual funds. Unlike traditional IRAs and 403(b)s, taxable accounts provide flexibility in how and when you pay taxes. There is also no cap on the amount that can be invested.
Windfall Strategies: Philanthropy
#12- Make Gifts to Family Members — Consider using a windfall to help family members deal with a financial crisis or fund goals such as education or the purchase of a home. In 2025, the annual gift tax exclusion allows individuals to give up to $19,000 per recipient without incurring federal gift tax or affecting their lifetime estate and gift tax exemption.
#13- Donate to Charities — Consider making a gift to a qualified 501(c)(3) educational, nonprofit, or religious organization. There may not be tax-saving benefits if you cannot itemize deductions, but giving to others can bring a deep sense of happiness, satisfaction, and purpose.
#14- Fund Random Acts of Kindness — Set aside a sum of money to help people you know- or total strangers- in small ways. Examples include passing out gift cards, ultra generous tips for servers, paying for the meal or purchase of someone behind you in line, and leaving quarters at a laundromat.
Windfall Strategies: Spending
#15- Invest in Home Improvements — Invest in your home by making improvements that have a high return on investment (ROI) such as bathroom or kitchen remodeling, landscaping improvements, a new garage door, an attic or basement conversion, a deck addition, hardwood floor refinishing, and energy-efficient windows.
#16- Buy Needed “Big Ticket” Items — Use a windfall to buy needed items for cash instead of using an installment loan or credit cards. Examples include furniture, electronics (e.g., laptop and flat screen TV), home appliances (e.g., refrigerator and washing machine), and outdoor equipment (e.g., lawnmower, grill, and patio furniture).
#17- Work on Your Bucket List — Spend money on things that you have wanted to do or buy and are on a written or mental bucket list. Examples include visiting national parks, traveling to other countries, attending a high profile event (e.g., the Super Bowl or Olympics), and staying at a 5-star resort.
#18- Catch Up On Medical and Dental Care — See a medical or dental care provider if you or a family member have skipped checkups and treatment due to financial constraints. Small dental issues caught early (like a minor cavity) cost less to treat than major procedures like root canals or extractions.
#19- Hire a Personal Trainer or Coach — Consider hiring a trainer or coach to help you with fitness, business, or life goals. Having an expert guiding, pushing, and supporting you and holding you accountable can make reaching your goals faster and easier.
#20- Splurge and Treat Yourself — Indulge yourself by spending all or part of your windfall on something that makes you happy. Examples include a designer handbag, a luxury vacation, a custom built walk-in closet, and a spa day or wellness retreat. Splurging can be fun and rewarding when balanced with financial responsibility.
Research Results
A study of how people would use windfalls found that about half would share their wealth with family, friends, and charity (53%), pay off debt (51%), and invest their newly acquired wealth (49%). Only 18% thought they would “splurge and spend freely.”
Three (More) Things
- Windfalls are relative, depending on the recipient’s income and assets. The same dollar amount can be life-changing for one person and life-enhancing for another.
- Windfalls are generally exciting but they can also bring stress when accompanied by family disputes.
- Windfalls can have downsides such as the loss of public benefits and higher taxes and Medicare premiums for some SSFA-impacted Social Security beneficiaries.
Six Smart Strategies
No. 1: Make a Plan — Decide how you want to divvy up your tax refund and/or retroactive Social Security benefits or salary increases. This money can be spent, saved, and/or gifted.
No. 2: Be Intentional — Pause before making big decisions. “Park” your windfall in a high-yield savings account or money market fund until you develop a plan.
No. 3: Rework Your Budget — Work the extra income into your budget for household expenses and/or savings if your retroactive income windfall is accompanied by a raise.
No. 4: Increase Retirement Savings — Consider saving all or part of a windfall in a Roth or traditional IRA or taxable account.
No. 5: Revise Your Tax Withholding — Remember that extra income brings extra taxes. Use the IRS Tax Withholding Estimator calculator to make sure your withholding and/or estimated taxes are correct.
No. 6: Get Help If Needed — Consult with financial professionals if you need assistance with tax planning and investment decisions.
In Summary
Financial windfalls and increases in income provide many benefits including debt relief, increased saving and investing opportunities, financial security, and lifestyle upgrades. They can also reduce stress, enable philanthropy, and offer freedom to pursue financial goals.
Did you receive a recent windfall? If so, make the most of it! Full disclosure: I spent my recent SSFA retroactive payment on a fancy dinner and landscaping improvements for my house.
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Dr. O'Neill is the owner/CEO of Money Talk: Financial Planning Seminars and Publications where she writes, speaks, and reviews content about personal finance. She is a Distinguished Professor Emeritus at Rutgers University and a long-time 403(b) plan participant.