Strictly from a tax viewpoint, the annuity has some advantages. Even if you did win the lottery, you might not be able to hold onto the money. One of the first things a lot of people do after receiving their newfound financial freedom is to quit their job. It's also natural to go on a spending spree: a fancy new house, a new car, a luxury vacation. And then, maybe, help friends, family, colleagues—everyone you've ever known will come out of the woodwork asking for a handout.
Drastically elevating expenditures, ceasing to earn income, gifts, and handouts—it's no small wonder so many lottery winners eventually end up in financial distress.
To avoid that, you will want to assemble a team of experts that may include an attorney for estate planning issues, a financial advisor, and a CPA or other tax specialist to help put a financial plan in place.
Get the financial guidance you need, take the time to plan out what you want to do with your newfound wealth, and refrain from making rash decisions—economic or otherwise. Certainly, helping those close to you is a good thing, but you need to set limits and learn to say no. There's another way that winning a prize can hurt you: If it's a scam. Here are some things all legitimate prizes have in common:.
The following are red flags indicating that a contest may be fraudulent:. Many people dream of winning a big prize in a lottery, contest, or sweepstakes. The problem is, when the prize isn't cash, the tax burden and additional expenses associated with your winnings can really add up. Before you accept any prize, find out what it's worth—and what it will cost you—before you accept it. Remember, when you win something, you are responsible for paying taxes on it.
Generally, you'll pay taxes in the year you receive the prize, which may not be the same year you win the prize. If you get a big cash windfall from the lottery or other types of gambling, avoid the common mistakes: Don't do anything rash or go on a spending spree before you've hammered out an overall wealth management plan and done some long-term thinking and goal-setting.
With lotteries, this includes determining how you want to receive the jackpot, which will impact how much you will actually get, and when you will get it. Before accepting any prize, consider the financial implications of keeping it and make the decision that will have the most positive impact on your long-term finances.
Otherwise, your big win could turn into a losing proposition. Internal Revenue Service. MIT Press Journals. The Financial Consequences of Winning the Lottery.
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We and our partners process data to: Actively scan device characteristics for identification. I Accept Show Purposes. As a result, annuities are a popular choice for those who want to receive payments over time and not in one lump sum payment.
It is important to understand the investment returns and costs of the annuity will grow over time. Like any high-stakes winner, lottery winners are at risk of squandering their money all at once or not investing it properly. Lotto annuities are generally inflexible, and many people find it difficult to change an immediate annuity. Annual payments on an annuity might prevent a winner from making investments that generate more money than the interest they earn on the annuities.
When deciding whether to take a lump sum or an annuity payout, taxes play a major role in their decision process. The advantage of taking the lump-sum option is that the tax owed will be calculated as it stands at the time of winning. After paying taxes on this amount, winners are free to spend or invest as they see fit. Some people might choose to get an annuity because they are betting that they will not have as much money to pay taxes in the future.
This is because there is uncertainty about how much money will be taxed at what rates in the future. When you take a lump-sum payment, it is less than the amount just reported as the jackpot. Taxes and discounts are taken out of the payment. You can take your winnings all at once or invest them on your own to help make more money later.
But the sheer size of this jackpot makes it hard for even the most ambitious spendthrift to blow all their winnings. This story was originally published on March 21, Facebook Twitter Email. Zoom In Icon Arrows pointing outwards. If you manage to beat the odds, here are key considerations and what you should do first. In other words, you should take a deep breath if you win. VIDEO Most winners choose to go with a lump sum, which can make the most sense financially. However, he said, know thyself.
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