The lottery jackpot is what many Americans dream of – a $2 ticket can turn you into a multimillionaire. It’s an alluring prospect, which is why people spend $90 billion on lottery tickets every year. But winning a big jackpot isn’t as simple as picking the right numbers, and even if you do, you may end up losing more than what you won.
The most common mistake winners make is going on a spending spree before hammering out a wealth management plan and doing some long-term thinking and financial goal setting. Then, there are the taxes you’ll have to pay. Depending on how you choose to receive the prize, you could be hit with a tax bill of up to 37 percent.
All of that can quickly decimate your windfall. For example, if you win a $10 million jackpot and choose the lump sum option, you’ll only get about $5 million after paying federal and state taxes. That’s because the IRS takes 24 percent of your winnings upfront to pay for withholding taxes.
Those with a long-term plan for their money can help mitigate the tax burden by taking annual payments instead of a lump sum. But this will result in you having to pay more in the future because you’ll be in a higher tax bracket for a longer period of time. This is why most people opt for a lump sum and invest their winnings. This can also help them avoid the risk of scams, jealousy, and other issues that can arise from becoming a multimillionaire.