What the best way to take your lottery winnings?
If you’re lucky enough to find yourself in the position of a winning Powerball ticket, there are a few important things you need to know, especially when it comes to how to claim your winnings.
First Things First, See A Professional
Before you even claim your winnings, see a tax professional. If you’ve won the big jackpot, you’ll have to decide whether you want to take a lump-sum payment or have it paid out in installments over the next 29 years (an annuity).
If you decide on a lump sum payout, you’ll need to pay tax on the full amount of your winnings. But with an annuity, you’re taxed as you receive your payments each month.
So, if you’re keen to blow the whole lot quickly, it may be better to receive the money in installments. However, you’ll need to sit down with your financial advisor and compare the effective yield of annuity payments with what you might earn if you take the prize as a lump sum – especially in terms of investments and taxes.
Something else worth considering is if you take an annuity, will it leave your loved ones with the money they need to pay estate tax should you pass away before the payment period expires. One of the wisest things to do, if you do choose annuity payouts is to take out life insurance to cover estate taxes.
Weighing Up Your Winning Options
Winning the Powerball jackpot is a big deal, and no doubt allows you to turn your life around and tick off those bucket list items. But here’s something to think about. Whether you take an immediate once off payment or spread your winnings out over the next three decades, the taxman will take 24% of your winnings before you even get your hands on your cash.
Let’s use an example. Let’s say you’re the lucky recipient of a $344 million jackpot. You’ll have the option of taking a lump sum of $223 million. But, the federal tax of 24% reduces that cash option around $170 million – a massive $53 million cut.
Then there are state taxes to consider. These are usually due or withheld, all depending on which state the ticket was purchased in. On average, state taxes can be anywhere from 4% to 5% and sometimes more.
Don’t Rush for That Lump Sum Payment
With so much to think about, you can see why you need a team of financial and tax experts on your side. While an upfront cash payment may sound enticing, it might just be better to take your winnings over 30 years.
Sure, in theory, it would be great to grab the cash and invest it for future growth. But that lump sum payout poses all sorts of problems and dangers. It takes time to learn how to handle a huge sum of money. If you take the annuity option, though, you’re assured a comfortable income for three decades and you can significantly avoid blowing all your winnings in one go.
Don’t Forget About Those Taxes
We can’t stress just how important it is that you take note of jackpot taxes. It sounds a little disappointing but think of It this way. Even if you spend your winnings on a luxury vineyard, a mansion, a yacht and a fleet of collector’s vehicles, you’ll still need to pay tax on your investments. You’ll even be taxed for gifting loved ones a piece of your winnings.
Plan for the Future
The key is to plan carefully before you decide whether to take a lump sum or annuity payments. While lottery winnings won’t make you immortal, you can at least work with professionals to see to your estate planning and ensure everyone is taken care of when you’re no longer here.
It sounds like a lot to take in. Fortunately, you have 60 days from the time of the draw to claim your prize and weigh up your options.
Find this week’s Powerball tips at Powerball.ca.