What to Do With Money If You Really Won Today’s Powerball Jackpot

You’re more likely to be trapped by lightning during a thunderstorm frog than you are by winning the Powerball, but hey, it’s always fun to play billionaire. If you win ( and you don’t ), there are several things you need to do to protect and optimize your winnings.

Choose between lump sum or annuity

Ah, the age-old question that all lottery winners (well, big winners) must face: do you take an annuity or a lump sum?

With an annuity, you get paid over time and you get more money. If you win this Powerball jackpot, you can opt for 30 annual payments, which averages around $ 37 million after federal taxes. Over time, this will amount to just over a billion dollars . (This depends on which state you live in , because you have to factor in these annoying government taxes.)

With a lump sum, you get all your money right away, but after federal taxes, that’s about $ 651 million. Not bad, I think, but it’s not a billion dollars. But here’s the thing: even though annuities increase over time, a lump sum can be a more profitable option if you invest thanks to a little thing called compound interest . Let’s say you invest $ 651 million in the broad stock market, which averages around 6-7% per annum after inflation. For simplicity, let’s say you don’t have government taxes. In five years, you’ll make $ 871 million. After 30 years – the term for the annuity to be paid – you will earn $ 3.74 billion . This more than makes up for the money lost by opting for a lump sum.

However, things are not so simple. First, you have to pay taxes on the money you earn from investing, and the annuity option has a big tax advantage. Tax attorney David Hrick explains:

If you take a lump sum, you will pay taxes twice. You pay for the prize itself and again for your investment. If you choose the annuity route, you will pay taxes on each contribution, but you will not pay taxes on your investments, while the government essentially keeps your winnings for you. This will increase over time as your winnings will grow, excluding tax requirements.

With the annuity option, Powerball basically invests money on your behalf, and according to Hrik, you get a pre-tax rate of around 2.8%. It is not much and you can invest better on your own, but remember: this money grows without taxes. As The New York Times notes, “You can never beat the effective zero tax rate on investment income earned through a Powerball annuity.”

Of course, you can also invest your annual annuity payment in the broad market, and then you pay taxes on that income as well. As we said, this is difficult.

These scenarios also assume that you are investing all of your winnings, which is unrealistic (this private island won’t pay off). They assume you have decades to invest and ride out the market downturn. There are so many numbers to work out and the outcome really depends on how long you need to invest, how much income you can expect and where you live.

A multi-millionaire doesn’t need so much math.

Luckily, Business Insider won a few numbers through the lottery a few years ago, and this is what they concluded :

if you can get a return anywhere between 3% and 4%, you would still be better off with a lump sum … However, with an investment in mind, it only makes sense to take a lump sum if you think you can get an overall reasonable rate of return.

Even the simplest set-and-forget investment portfolio averages 6-7%, so these numbers indicate a lump sum. But it basically boils down to the lump-sum investment advantage over the tax savings of the annuity. And most experts seem to think that the tax savings from the annuity outweigh the return on the lump sum. You can also opt for an annuity if you find it difficult to manage your money.

Know the rules, don’t let the system confuse you

Before rushing to get your ticket, take time to soak it all up. I know you are a multimillionaire! It’s time for the couch jumping and champagne popping. However, if I have learned anything from sitcoms, it is thatimpulsive actions when winning the lottery always backfire.

It takes time to understand the rules and come up with a sensible plan. And don’t worry about missing the deadline: in most states, you have 180 days to request a ticket. (Mark your calendar, though, because you’ll be kicking yourself if you miss this deadline!)

Make a copy of your ticket and put the original in a safe place (literally, in a safe). When friends, family, and creditors find out that you have won, they will pester you non-stop. Forbes recommends the following strategy to avoid this:

… check state rules to see if you can dodge everyone by staying anonymous … winner publicity rules differ from state to state. In New York, for example, the names of the winners were made public. Elsewhere, you may be able to maintain your anonymity by setting up a trust or limited company to collect winnings, ”says Beth S. Gamel, CPA at Pillar Financial Advisors in Waltham, Massachusetts. Gamel’s client, who had won the lottery in the past, did so and asked a lawyer to claim the prize on behalf of the foundation. In South Carolina, where the winner bought his ticket on September 18, it is also possible to remain anonymous.

If you are married, your spouse is entitled to a portion of the winnings. According to the Legal Zoom, spouses’ earnings are generally considered family income, so if you buy something with that earnings – even if it’s a lottery ticket – the item becomes family property. If you are going through a divorce and won the lottery, your ex may also be eligible for a portion of the winnings. It depends on how long you lived to get divorced and where you live (laws vary by state).

You may have won the Powerball in the office pool. In this case, things get a little confusing. You should have thought about that before asking Noel, the accountant, to come with you, but there you are. In most states, there can be only one recipient per ticket. Thus, you will need to create a coherent whole to represent all the winners. AmericanBar.org explains how it works :

Thus, in a situation with multiple beneficiaries, it is advisable to create a legal entity, because if only one person in the pool claims a prize, when that person distributes prize shares to other members of the group, it could be a taxable gift. … In addition, only that individual will receive the W-2G by reporting lottery winnings as 100 percent taxable for him or her for income tax purposes. In addition, it may be inconvenient for other pool members if only one participant claims the prize as the winner, individually … In these cases, the group device must be used for all purposes and must be properly documented.

A good lawyer will guide you through these questions, but they will help you understand what to expect. After you request your ticket, you have another 60 days to decide how you receive payment.

Calculate how much you will actually lose due to taxes

Congratulations – you hit the one percent! This means that you will pay a ton of taxes, but unlike your colleagues, you will not have the opportunity to think about how to protect your millions with tax loopholes. You have to pay.

The Powerball website has put together the numbers for you so you can see how much you will pay both federal and state taxes depending on where you live and whether you are taking a lump sum or an annuity.

Assuming you quit your job, you will also have to pay the estimated quarterly taxes. A good CPA can help you figure it out and avoid tax penalties. It’s pretty straightforward though. If you do not have a full-time job, you do not have an employer who regularly pays taxes on your behalf throughout the year. Therefore, you must make these payments every few months using IRS Form 1040 ES if you have income for a year. You can also pay these taxes online .

Keep in mind: you, too, are now in the highest tax bracket. For 2016, this means that your rate of federal income tax rate is 39.6% . Again, you will pay all taxes at once in a lump sum, so the rate will not change. However, if you opt for an annuity, your rate may well change over the years. Here’s how one tax pro explained it to Business Insider :

“As we know, tax rates are constantly changing. If you take the lump sum, you will receive a 39.6% rate. If you take an annuity over the next 30 years, the rates are likely to be very different when you receive each payment. ” Thus, people who expect that the maximum tax rate will decrease over time – or that the flat tax crowd will win – should receive this annuity.

On the other hand, if you think the tax rate will only increase over time, you will want to take a lump sum.

Hire a team of consultants that won’t blind you

At the very least, you will need a lawyer, certified financial planner, and tax preparer .

A real estate attorney can help you figure out how to create a will and trust, as well as other complex legal documents. Here’s what you’ll need real estate attorney Barry Nelson:

When drawing up the Will and Trust, the lottery ticket winner will have to take into account complex non-tax issues. For example, at what age should the winner’s children inherit such large amounts of money in the event of the death of the lottery winner. Most of my clients find it beneficial to postpone large mailings to younger family members until they graduate from college and gain work experience in order to build a healthy work ethic.

Find a good lawyer by asking a trusted friend or family member, or by searching the American Bar Association website . “You can even look to past lottery winners,” suggests Richard Morrison , who won $ 165 million in 2009.

When you meet with your lawyer or speak with him on the phone, you should feel comfortable and he should explain things clearly. And beware of that big red flag, as attorney John M. Phillips points out on his website :

DO NOT agree to give them a percentage of your winnings or anything like that. If they ask … this is the wrong lawyer. Just find someone you trust and offer a fair fee and / or hourly compensation to help you make the right decisions and protect you from people who will seek to separate you from your windfall.

When looking for a financial planner , make sure it is a certified financial planner who takes the fiduciary oath and is legally required to act on your behalf. Ideally, you also need a paid financial advisor. This CFP should also be able to help you with taxes or refer you to someone who can help.

Protect your huge nest egg

A good lawyer can help protect your money. They will suggest a range of legal steps and insurance products to help protect you from anything that could go wrong with your money: lawsuits, creditors, divorce.

Forbes explains in more detail how this asset protection plan works .

The best defense is to erect various barriers that will make it difficult, if not impossible, for creditors to access your money and property. These so-called asset protection strategies can range from the use of state exceptions to the creation of multiple barriers through the use of trusts and family limited partnerships or limited liability companies. It may be possible to rely on many strategies, either individually or in combination with each other.

For example, Morrison told Time that his lawyers even offered kidnapping and ransom insurance to protect his family. He says he refused, but hired security to protect his home and children. He also advised getting your lottery ticket away from your hometown.

Of course, it’s probably a good idea to pay off your old debt and also learn a few good financial habits. You are rich, I understand, but if this can happen to Wayne Newton , it can happen to you. Also, when you have debt, it means that you pay interest. Obviously, you want to pay it all off at once so that your interest on debt doesn’t offset the interest you earn from investing.

But overall, you will probably be fine. With the right planning and a basic understanding of how the system works, you should be in pretty good shape. That is, provided that you really win.


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