When lottery jackpots grow into hundreds of millions or even into a billion dollars, the eye-popping number sets off a frenzy of ticket buying. However, a winner won’t keep all that cash once lottery formulas and tax collectors have their say. If you decide to buy a few tickets, make sure that you keep track of your tickets and receipts. And once you’ve decided to invest some of the winnings, hiring a team of advisors familiar with working with ultra-high net worth families will help ensure that all your legal and financial ducks are in a row when you win.
The odds of winning a jackpot vary greatly from state to state, but are usually based on the total number of numbers drawn in each drawing. For example, a winning ticket in Florida must match all five white balls and three red ones to have a 1 in 35 chance of hitting the jackpot. In addition, the state’s sales taxes and retailers’ commissions reduce the total prize amount.
There are two payout options for lottery winners: annuity or lump sum. The annuity option gives you a set payment over 29 years, with the payments increasing by about 5% each year. Most winners choose the lump sum option, and the after-tax winnings are typically about 30% of the headline jackpot amount (e.g., a $100 million win would result in around $30 million after taxes).
One reason why jackpots are growing larger is because of higher interest rates. Lowering the odds of winning can lead to jackpots that roll over for weeks, and creating truly massive pots of money can encourage more people to play.
Another way to increase the chances of winning is to diversify your lottery numbers. Don’t stick to predictable sequences or those that end in similar digits, as the probability of hitting them decreases with repetition. Instead, aim for a range of 104 to 176. A randomizer app can be helpful in this pursuit.
You can also try your luck at a free online lottery game. But, remember that you’ll still owe significant income taxes on any winnings. One way to offset this is to fund a charitable entity, such as a private foundation or donor-advised fund. These entities allow you to claim a current-income tax deduction while making payments over time. To learn more, check out CNBC’s Warren Buffett Guide to Investing, which distills the billionaire’s do’s and don’ts into three simple principles. Alternatively, you could donate the proceeds of your jackpot winnings to charity and receive a full federal deduction for them. This approach is especially attractive if you expect to be in a lower tax bracket upon receiving the funds. Otherwise, you’ll owe the government about 24% of your winnings. (As a note of caution, you may have to pay the state’s income taxes on any winnings as well.) In any case, don’t let a fear of paying taxes prevent you from participating in the lottery.