Winning the Lottery Checklist

As of this writing, the estimated jackpots for the next lottery drawings are $138 million for Powerball and $137 million for Mega Millions.  Winners can elect to receive their winnings annually over a thirty-year period or a one-time lump-sum payment.  

• Jackpot winners choosing the lump-sum option would receive $65.8 million (Powerball) and $63.0 million (Mega Millions).  

The odds of winning are definitely not in your favor, so you should only play the lottery sparingly as a form of entertainment.  I sometimes buy a ticket once the estimated jackpot exceeds $300 million because it is fun to dream about what I would do with the winnings.  While you almost certainly will not win the lottery, having a plan before you win can help you avoid becoming the focus of the next story about lottery winners who go bankrupt.  For me, having a plan starts before even playing the lottery.

• Because the venue selling the winning ticket often receives a sizable prize as well, I like to purchase my lottery ticket from a mom-and-pop shop in my neighborhood rather than a vending machine at a chain grocery store.  On the off chance that I win, I want a small business in my neighborhood to win as well!

Where did you buy the winning ticket?  

While you do not need to live in a state that participates in the lottery to play the lottery (or even in the United States at all!), the state in which you purchased the winning ticket is crucial.  State law for the place of purchase, which can be the same as or different from where you live, determines how much time you have to claim your winnings, whether you can remain anonymous when you claim your prize, and procedures such as splitting your winnings (for example, if you participate in a lottery pool with a group).  Familiarize yourself with these details so you can formulate a plan before claiming the jackpot.  

What do you need to decide before claiming your winnings?

You need to decide when and how to claim your winnings, and where the money will go initially.  

For timing, I suggest claiming your winnings as soon as you have a solid plan for doing so.  You do not necessarily need to know the “final destination” for your newfound wealth but you should at least have the initial steps mapped out.  This way, you can start putting the money to work for you sooner rather than later.  Even if your money just sits in a high-yield savings account for another two months while you decide what to do with it, at least it is earning interest!  (Earning 4% annually on $100 million is a lot of money!)  

Avoid making any hasty decisions when formulating your strategy.  Make copies of the winning ticket, store the original and copies in safe places, and even consider taking a vacation to get away from the hustle and bustle of daily life so you will not be distracted during the planning process.  Do not tell anyone about your windfall.  (More on that later!)  

• If you have a partner, you should absolutely involve them in this process, whether you claim the winnings jointly, separately, or wholly by yourself.  

Your first decision is whether to choose the annuity (paid out over thirty years) or lump-sum (paid out all at once) option.  The lump-sum option typically pays out only about 45% of the total value of the annuity payments.  Assuming a $300 million jackpot, your options would be:  

• Annuity option:  annual payments of $10 million for thirty years  

• Lump-sum option:  one-time payment of $135 million

Visit with an advice-only financial advisor to crunch the numbers and see which works out best for you in the long run based on prevailing interest rates and risk tolerance.  If you are disciplined and strategic, the lump-sum payout usually offers more long-term potential, but that is not automatically the best for your situation.  Personal finance is, after all, personal.  

Once you decide between the thirty-year annuity or one-time lump-sum payment, you need to choose how to claim your winnings.  Are you claiming the jackpot by yourself, or are you splitting it amongst a group?  Do you plan to donate a portion of the money from the outset?  Will you receive it in your own name or through an entity (if allowed by state law) such as a trust, family partnership, or other structure?  Consult an attorney regarding entity structures.  

I strongly recommend that you remain anonymous in claiming your winnings if at all possible.  Part of this means making no immediate moves like quitting your job the day after the drawing.  Be stealthy.  This way, you can share your wealth—or not!—on your own terms free of outside pressure.  It probably goes without saying that all sorts of folks will come out of the woodwork once news of your windfall gets out.  

• Your financial team helps you plan, manage, and protect your money, including quite literally acting as a barrier against outside forces.  Even if someone knows you are ridiculously wealthy, you can honestly say “my financial advisor has it tied up in a trust” to deflect requests for handouts.  

Finally, you need to decide where to initially park your funds.  A liquid money market mutual fund at your brokerage of choice is a safe bet because it will give you the flexibility you need as you make later decisions.  Talk with your financial advisor about your options.  

I claimed my winnings.  Now what?

Assume you won the $300 million lottery jackpot, chose the $135 million lump-sum option and to remain anonymous, and directed your state lottery (where you purchased the ticket) to wire the funds to your money market account at Vanguard.  

However, $135 million is not the amount that ends up in your brokerage account.  Gambling winnings—yes, playing the lottery is gambling!—are taxable income.  Much like federal income taxes are withheld from your paycheck, the IRS will generally require the state lottery commission to withhold 25% of your winnings, and the state lottery will typically want its piece of the pie as well.  If your state has a mandatory 5% withholding, you will have $94.5 million left after federal and state tax withholdings.  

You will still owe additional taxes at the end of the year, though, so set that money aside now with the assistance of a trusted tax advisor.  The top marginal federal tax rate in 2024 is 37%, so allocate an additional 12% (i.e., $16.2 million) to meet your federal tax burden for the year.  

• The 0.9% additional Medicare tax only applies to wages, and the 3.8% net investment income tax does not apply to gambling winnings.  

• Your actual tax liability will probably be less due to progressive tax brackets, charitable contributions, etc., but I always advise being conservative when estimating taxes to avoid a shortfall.  

Additionally, state taxes could be as high as 13% depending on where you live.  If you purchased your winning ticket in a different state from where you live, you will have extra complications, but the shorthand here is that you will ultimately be subject to the higher top marginal state tax rate.  If you purchased a jackpot ticket in Connecticut (top marginal rate = 6.99%), but you live in the District of Columbia (top marginal rate = 10.75%), focus on the higher 10.75% rate, and set aside an additional 5.75% (i.e., $7.8 million) so that you can pay all the state taxes you will eventually owe.

Park the extra $24 million (i.e., $16.2 million + $7.8 million) you will need for federal and state taxes in certificates of deposit (CDs) that will mature shortly before the tax-payment deadline (typically April 15).  Do not invest this money; it is earmarked for an expense you will have in less than a year.  Work with your financial advisor to find the best CDs available and spread them out among multiple banks to decrease risk.  This plan allows you to gain interest on the money prior to the tax deadline—and even a little bit of interest on millions is still a lot of money!

Pay yourself first.  

After setting aside enough money for taxes, you still have $70.5 million left.  This is the amount that is “available” for planning purposes when you think about your priorities and what kind of legacy you want to leave.  

If you are in any kind of debt or have immediate needs, take care of those right away.  

Make sure that you own a home free and clear.  It can be your current home or a new home.  Have some fun with this, but be smart!  A mansion with exorbitant upkeep expenses may not be the most prudent method to keep you financially secure.  Consult your attorney on the best way to hold the title to your home.  

Now consider your desired lifestyle, including places you want to visit and bucket-list items you want to cross off your list, and work with your financial advisor to figure out your expected annual spending under this construct.  Set aside enough money to fund your desired lifestyle in perpetuity.  Work with your financial advisor and attorney on the best structure here.  Many folks pursuing financial independence follow the 4% rule, but I suggest being very conservative in the “jackpot” scenario and using 3%.  Why take chances when you can easily afford to avoid risk?  

• Consult your tax advisor regarding expected future taxes, which are part of your annual expenses and will depend on a variety of factors including your financial structure and place of residence.  You may even be able to establish residency in a different location to ease your tax burden.  Be sure any change of residence is bona fide, though, and not just an illusion. 

If your anticipated annual spending under this approach is $1.2 million, you would need to set aside $40 million using the 3% rule suggested above.  (Work with your attorney and financial advisor to make sure your nest egg is protected, and work with your tax advisor to discuss options like charitable remainder annuity trusts and charitable gift annuities that provide a stream of income while maximizing tax efficiency.)  That still leaves you with $27 million after purchasing a $3.5 million home!  

What sort of impact do you want to have?

While $27 million is a far cry from the initial $300 million jackpot, remember that you have paid your taxes, purchased a beautiful home in your desired location(s), and set aside enough money to fund a luxurious lifestyle in perpetuity.  If you had $27 million after taking care of yourself, what would you do with it?

This is the step at which to consider helping your loved ones.  Be generous, but not overly so, because otherwise this money will quickly evaporate.  Personally, I would make sure that each of my parents, siblings, and nieces and nephews had a home to live in and a trust to provide a modest amount of additional income that would be protected from creditors.  

Also consider whether you wish to support any particular charitable organizations.  (I would love to see the DC Revolution—a 501(c)(3) tax-exempt organization—have its own rugby complex!)  Work with your tax advisor on how best to structure this support.  There are often tax breaks available, but never spend money just for the deduction.  A donor-advised fund may also be appropriate if you want to allocate money for charitable purposes but are not yet in a position to decide which specific organizations to support.  

Be sure your affairs are in order.

Your team should include a financial advisor, an attorney, and a tax advisor.  Make sure you have a cohesive plan that is easy to execute, your assets are protected, and your estate plan is current so you can enjoy your newfound wealth and have a positive impact on the world around you.