I have been suing my ex-manager, who owns the company I worked for, for sexual harassment and wrongful termination for being fired for reporting him. There was no human resources department. A colleague recently witnessed a physical incident and gave me an affidavit and disclosed what he saw in the affidavit.
This was in October 2018. The state Department of Human Rights conducted its investigation. Now, the cases against this man and his company are being filed in the court system by a lawyer.
In short, I have been told that if you settle the case out of court and drop the case, there is a multi-million dollar amount to expect under the pending agreement.
Not sure I want cash results. I want him to be held accountable on public records databases. Before I agree, I need advice on what to do with the money to avoid paying the 40% tax.
I have my own small project, and I have ideas on what I might want to do with some funding – but I was wondering if you have any information regarding the following questions:
Where do I put the money to keep it safe and tax free until I decide what to do with it – and can I access it when I need it, rather than waiting until I’m old?
What kind of industries or areas can I invest money in that will generate returns on my monthly expenses in the future? Real estate is what people say but that’s not a definite, and I also see it as a gamble.
-Help one mom
Dear mom ,
She did not seek advice about accepting this settlement. But this part is the key. Until you make that decision, discussing investment and tax relief strategies is premature. I worry that focusing so much on financial results at the moment might distract you from knowing what you really want.
You didn’t ask to be in this awful situation. And you don’t owe anyone anything. It is not your responsibility to hold this man to account alone. But think carefully about your emotional health, as well as your financial needs.
How would you feel if other allegations surfaced and you were unable to speak? Or if your ex-manager continues to abuse someone else? Of course you are not responsible for his actions in any way. But you have to be comfortable with what you gain and give up. If possible, take some time to talk about your feelings with a therapist.
The tax bill is an unfortunate reality for sexual harassment survivors – although I’m not sure where the 40% you mentioned came from. Whether you reach a settlement or win a lawsuit, Uncle Sam taxes the same amount. Damage related to bodily injury is usually not taxed. But if the damages are caused by emotional distress, the IRS generally considers it taxable as ordinary income. This applies even if the distress is so severe that it makes you physically ill. (I should note that I am not a lawyer, and there is a large gray area here. It is essential that you consult an experienced personal injury lawyer.)
Let’s say you receive a $3 million settlement, and you pay a third of it in attorney fees. The remaining $2 million in ordinary income tranches, which is 37%, will be taxed. Unless you put that money into a tax-advantaged retirement account, you don’t need to wait to access it.
If you receive a settlement or judgment, proceed with caution. When someone receives a large sum of money at once — whether it’s from a settlement, an inheritance, or because you won the lottery — they often feel pressured to make big, life-changing decisions. This can make you vulnerable to people who don’t care about your interests.
I think the best solution here is to set aside a year’s expense in a savings account or certificate of deposit (CD). Then invest the rest in the S&P 500 Index Fund for the time being. This can be a tedious 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 allocate your investments accordingly.
But before agreeing to anything, make sure you fully understand all the terms. Ask your attorney plenty of questions about what the settlement involves, as well as your options for suing your former boss. If you feel pressure to settle quickly, it’s time to find a new attorney.
Focus on finding the best course of action for your overall well-being. Money is certainly one of the components, but it is not the only factor. There is no right or wrong answer here. This is about figuring out what’s right for you.
Robin Hartell is a certified financial planner and senior writer for The Penny Hoarder. Send your tough financial questions to [email protected].