Four Things to Know If You Win the Lottery

 If by chance you become an overnight millionaire, you might want to consider the following before you quit your day job or buy that new luxury car.
Take lottery winnings in a lump-sum.  If you’re disciplined enough not to spend the money all at once, you may want to consider taking it all in a lump-sum. Typically, receiving your winnings in this manner will give you more money in the end than if you were to be given payments over the years. For example, if you receive $1 million and pay half of that in taxes, you’ll end up with $500,000 to invest. At a hypothetical 10 percent rate of return, your winnings would have the opportunity to grow to more than $3.3 million in 20 years. By comparison, if you chose to receive your windfall in 20 annual installments of $50,000 and invest each year at that same 10 percent, you would end up with approximately $2.8 million — a difference of more than $500,000.  The more money you can get invested right away, the better off you could be.
Choose the installment option if you’re a spendthrift.  On the other hand, if having an account with a lot of money in it is too tempting for you to handle, take your fortune over a period of several years. You may not have this option with every type of windfall, but if you happen to win the lottery, the sponsor may invest your winnings for you. You may get a better rate of return by taking the money in a lump-sum, but that’s no use if you end up spending all of it without planning.
Keep income taxes in mind. Most likely, about half of what you win or inherit will go to pay federal and state income taxes. And remember, a multi-million dollar payout this year would put you in the highest federal tax bracket at 39.6 percent. Add state income taxes to that, and you may end up losing half of your money to taxes. In cases where winning lottery tickets are purchased outside your home state, it’s possible that you would be taxed in your home state and the state where you purchased the ticket. Careful tax planning can help you keep as much of the money as possible.
What happens when you die? If you’re married, the money – no matter how much – may be transferred to your spouse free from estate taxes. However, if you’re single, the amount totals more than $5,430,000, and you die this year, your heirs may have to turn over 40 percent of it to the federal government in the form of estate taxes.
As you can see, without careful planning, a financial bonanza could become a nightmare. A financial advisor can help you take appropriate steps to help you manage the windfall more effectively.
For more information, please visit www.wellsfargo.com.