Nobody likes paying taxes, especially not lottery winners. The lottery withholds about 25% right off the top of a prize amount for federal tax, and then — depending on the state a winner lives and his or her tax bracket — another 6-9% for state taxes. That doesn’t seem like too much, but when you win $20 million, that’s a stagger $620,000 gone, just like that.
Fortunately, there are ways lottery winners can recoup that loss, or minimize what’s taken out. Here are just a few.
Choose to Receive the Winnings as an Annuity. When you win the lottery, you can get your new fortune as a lottery lump sum payout, or as a lottery annuity settlement. This latter arrangement provides the winner with annual lottery payments that usually increase over time until the winnings are gone. Since tax rates typically change from year to year, there’s a chance that less taxes will be taken out if a winner chooses an annuity over a lump sum payout.
Put It All in an Account and Don’t Touch It. On the other hand, a lottery lump sum payout can also accrue interest far faster than an annuity can, which means that if deposited, it’ll recoup the money taken out from taxes more quickly. Think about it. If there’s an .08% interest rate on an account, $1,380,000 is going to get more interest than the few thousand an annuity will deliver.
Invest in a Business. Perhaps the most obvious way to make money with your lottery winnings is to start a business, or invest in a successful one. Of course, this is a real gamble, as the business may just wind up failing, but it can also prove to be a great investment, creating a source of income for years to come.
Don’t feel too bad about getting huge chunks of money taken out of your lottery winnings, since there are ways to recoup it all. If you have any questions, feel free to share in the comments.