Woohoo! After years of playing the lottery, your numbers finally came up. You’re a winner! Before you get too excited, take our advice and avoid these common pitfalls that will take you from euphoria to bankruptcy faster than you can sign that ticket.
1. Assume you get the full amount.
Good news – in Canada, you’ll likely get to keep the full amount of your lottery win because most windfalls aren’t subject to taxation. Keep in mind, though, that the amount you receive can still be affected by where you won the money, how you choose to receive it, and what you do with it.
While most Canadian wins are tax-free, the US Internal Revenue Agency begs to differ. Lottery and casino wins in the US are taxable, so what happens in Vegas sometimes really does stay there. Casino wins will have taxes withheld even before you leave the country. Lottery wins require you to file a US tax return and pay taxes on the amount. Even wins in online forums may be subject to these rules.
Also, most lottery winners are given the choice of accepting a lump sum or receiving annual payments over time, called annuity. If you choose to take your winnings upfront, the amount will be smaller than advertised, but you’ll have the opportunity to invest it to generate a higher return. So … what should you do? It all depends. Your age, tolerance for financial risk, and ability to handle a windfall in a lump sum will all determine your best option. (We recommend you get some good financial advice on this before making a decision.)
And while the original amount isn’t usually taxable in Canada, earnings on it are. More on this later, but you know the saying: nothing in life is certain but death and taxes.
2. Post your big news on social media.
If you got this far into the article, you should now be aware that you have a lot of big decisions ahead of you. Sharing your news on social media will spread it to anyone and everyone you know – second cousins twice removed, ex-boyfriends of ex-girlfriends, your stepson’s teacher from three years ago … we know how your social media ‘friend’ list works.
Take a minute and soak it in. The news will be out there soon enough, including through legit media outlets, and you won’t be able to control it. You need to put a plan in place first. This isn’t the time to start winging it.
Your first step should be to get some trustworthy advice. Now that you can afford it, hire an experienced chartered professional accountant and a tax or estate lawyer, stat. They’ll help you figure out your next step before all the social media armchair experts weigh in.
3. Quit your job.
Just like making a big announcement on social media, now is not the time for big changes anywhere in your life. Let’s face it, until you’ve had time to figure out your financial planning, you have no idea how long that money is going to last you. Take a leave of absence or book a vacation, sure, but if you really think you’re going to ride off into the sunset on $100k win, you need a wake-up call.
Before you call your boss, do us a favour and Google “lottery winners + bankruptcies”. You’ll be too busy scrolling the hits to even contemplate quitting your day job just yet.
4. Promise to share the winnings.
Kids, parents, brothers, sisters, childhood friends, your children’s friends, the guy stocking the shelves at your grocery store: everyone is going to expect a cut.
Before you start doling out your winnings, carefully consider how much you want to share. Hopefully, we’ve successfully prevented you from quitting your job but most lottery winners still don’t want to have to work until they’re 80.
If you’re in debt, pay it off first. Then make a list of everyone you want to distribute some of your winnings to, including charitable organizations or other institutions of importance to you. Thankfully, we know you already took our advice to hire a skilled accountant, so get their thoughts on how much you’ll need to invest to meet your own needs and goals.
Only then will you be informed enough to know how much of your windfall you’re prepared to share. Don’t make any promises until you’re good and ready to do so.
5. Invest it all.
You read the teaser – even though most lottery wins in Canada are tax-free, there are exceptions. So maybe you’ll invest it all and maybe you won’t, but without reliable advice from a financial expert, you might not understand all the implications.
Once you’ve invested your winnings, anything you earn from them will be taxed. That means you’ll be on the hook for interest gained on your investments and subject to capital gains tax when you sell.
Consider putting those winnings into a Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRS)P instead, if you have the contribution room to accommodate it. An accountant can help you minimize your tax burden by finding alternate investment portfolios like these, or managing the amount you’ll potentially lose from capital gains tax down the road.
And if you won that money at work, well, you won’t even have all of it to invest. It’ll most likely be considered a taxable employee benefit and you’ll need to pay income tax on the amount.
6. Invest none of it.
This leads us into our final point, but hey, no matter how much you’ve won, it’s unlikely to last forever. You need to think about the future with a financial plan that has your long-term security in mind.
7. Assume the money will never run out.
Remember that Google search we told you to do on bankrupt lottery winners? It happens. The money can (and will) run out if you’re not careful about how you manage your new windfall.
Earlier this year, 18-year-old Juliette Lamour won $48 million, becoming Canada’s youngest lottery winner of a prize that size. Her plans with the money include finishing school. Well played, Julliette. Even a prize that big isn’t guaranteed to last forever, and everyone knows money can’t buy happiness anyway. It’s important to hold onto your dreams and have a back-up plan in place.
If you’ve just come into a windfall, get the advice you need by consulting an experienced chartered professional accountant pronto. They’ll help you with a financial plan that’s a sure bet to make those winnings last and help you avoid becoming the star of the next lottery-winner-to-bankruptcy-victim sob story. And if you’ve just won big on a ticket, we already know you’re the betting kind.