After no one hit all the winning numbers in Tuesday night's Mega Millions drawing, the jackpot amount has jumped to a whopping $405 million.
Between it and the $229 million Powerball jackpot, $634 million is up for grabs in the next drawings — Wednesday night for Powerball and Friday night for Mega Millions.
A customer buys Powerball tickets at Kavanagh Liquors on in San Lorenzo, California.
If you're lucky enough to win either jackpot, you might think it's so much money that you can just start spending as much as you want, on whatever you want, for as long as you want.
Guess again. For starters, the advertised amount is not what winners end up with. Taxes take a big bite out of the windfall, and protecting the remainder involves planning how much to save and how much to spend.
While the specifics of those decisions are best made with the guidance of experienced experts, here are the basics that you'll have to consider.
First, the tax hit
Whether you choose to take your winnings as a lump sum or as an annuity spread over 30 years, the IRS will shave off 24 percent of your winnings before it even gets to you.
For the $405 million Mega Millions jackpot, the immediate cash option is $235 million. For the $229 million Powerball jackpot, it's $134.3 million.
The 24 percent federal tax withholding would reduce Mega Millions' cash option by about $56.4 million to $178.6 million, and Powerball's by $32.2 million to $102.1 million. You also should anticipate owing more to Uncle Sam at tax time.
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On top of the IRS withholding, you'll pay state taxes on the money unless you live where lottery wins are untaxed. For states that take a piece (most do), the rate ranges from a high of 8.82 percent in New York to a low of 2.9 percent in North Dakota, according to lottery site USAMega.com.
If you suddenly become one of the wealthiest people in the country, minimizing your tax burden will likely become one of your financial priorities. Make sure that when you turn to experts for help, your team includes a tax advisor and financial planner, along with an attorney experienced in helping lottery winners (this should be your first call).
Immediate spending
Experts say it's OK to splurge on yourself upfront, whether it's for a new car, new house, overseas vacation or something else you've been coveting. The important thing is to set boundaries right away — even when the amount you win seems unlimited.
"It's important to set up a preliminary plan and budget right from the start," said Jason Kurland, a partner at Rivkin Radler, a law firm in Uniondale, New York. "Emotionally, having an initial structure in place is extremely helpful for winners, because this is such an overwhelming experience."
Also make sure that you set boundaries for family members and friends as well.
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"It feels good to treat people to vacations and buy a house for Mom, but you don't want to do it to the point where it can damage your life goals," said certified financial planner Jim Shagawat, president of Windfall Wealth Advisors in Paramus, New Jersey. "When the gifting starts, it's difficult to stop."
One type of giving, though, can be useful to more than just the recipient. If you are charitably inclined, remember that donations are tax-deductible for people who itemize their deductions.
Setting up a charitable foundation or similar entity in the year you receive your jackpot winnings can help reduce your immediate tax burden. However, your own tax advisor can help navigate exactly how and when to approach your charitable giving.
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One common way to help ensure your money lasts is the so-called 4 percent rule. That is, if you withdraw no more than 4 percent of your money each year, it should last at least several decades as long as it's properly invested in a diversified portfolio, Shagawat said.
While that withdrawal rate sounds small, it's no chump change when applied to the current Mega Millions and Powerball jackpots, even after the tax hit.
Basically, for every $100 million that a winner gets, the 4 percent rule would mean they could safely withdraw up to $4 million each year without running out of money for decades.
Of course, the amount that's right for you depends on your own goals for your newfound wealth.
