Have you ever fantasized about lottery winnings and what you would do with all that money? While winning millions of dollars could release you from financial bondage, you might end up with a lot less money than expected.One of the biggest drawbacks of lottery winnings is most people go on wild spending sprees, travel around the world, and give large sums of money to family and friends. While most people believe they can't burn through a million bucks in their lifetime, chances are the money will be gone much faster than ever imagined. Research shows less than 20-percent of lottery winners hold onto their winnings for more than two years. Imagine becoming a millionaire only to end up broke!
Another problem is once people hear you won the big jackpot, long-forgotten relatives and complete strangers expect you to be their personal bank. As most people know, money can bring out the best and worst in people. Winning the lottery can quickly become a stressful event which can lead to family dysfunction and ruined friendships.
Many people do not realize jackpot winnings are subjected to state and federal taxes and can equate to nearly 50-percent of overall winnings. Individuals who elect the lump sum payout receive significantly less than those who opt for installment payments.
Mega million Powerball winnings can be paid through quarterly, semi-annual or annual installments over a period of 20 years. A structured settlement annuity is established through a life insurance company. Annuitants receive a set amount based on the payment option they elect when establishing the structured settlement.
When individuals receive annuity payments their lottery winnings typically fall into a lower tax bracket. Electing this option allows lottery recipients to receive a larger payout over the long term while reducing taxes.
The average payout through the Lottery Commission is approximately 65-percent when winnings are distributed as a lump sum payment. If a person were to win $1 million in the Powerball lottery, they would receive a pre-tax payment of $650,000. However, the full $1 million would be subjected to taxes, making the final payout around $325,000.
Recipients who enter into a structured settlement would receive an annuity payment of approximately $40,000 per year for 20 years. Taxes would be assessed on the annual income and recipients would net about $25,000 to $30,000. They would receive between $500,000 and $600,000; nearly double the amount of the lump sum payment. Actual lottery winnings will vary based on state lottery regulations and the recipient's tax status.
Individuals can potentially double or triple lottery winnings by investing in real estate, starting a business, purchasing cash flow notes or other investments which offer a good return on investment. At minimum, lottery winners should commit to setting aside at least 10-percent in a high yield savings account, money market fund or certificates of deposit.
Although winning the lottery can provide financial freedom, it can present complicated tax matters that require close attention and careful planning. Engaging in smart investment strategies can minimize tax consequences and maximize lottery winnings.
Prior to deciding how to accept lottery winning payouts it is best to organize a team of professionals that can offer financial guidance and investment strategies. At minimum, lottery jackpot recipients should retain the services of a lawyer, tax accountant or CPA, financial advisor, and investment strategist.