An effective tax management strategy may encompass aspects of deferral, reduction and, in certain instances, elimination of income taxes.
You are a lottery winner! Since you chose periodic payments and did not take the lumpsum the lottery offers (in most states) it is important to consider the tax options to assist you in making the best investment options as possible. Assume, for example, an individual is in the 40% tax bracket and earns $100,000. Without any tax planning, the taxpayer would immediately pay $40,000 in taxes, retaining $60,000 on which to earn a rate of return. However, with appropriate tax planning, that same taxpayer could earn a rate of return on the entire $100,000, paying income taxes only when funds are received in the future. The greater the funds on which to earn a return, the greater the future accumulated wealth. Clearly, the prudent individual would rather invest (and earn a return on) $100,000 as opposed to $60,000.
While utilizing pre-tax dollars to save for the future is one of the most sensible means of accumulating wealth, certain strategies also permit the return achieved on such funds to grow tax-deferred, the result of which is a faster rate of growth than can generally be achieved by means of traditional after-tax investment strategies. As demonstrated by the prior example, effective tax management can result in an accumulation of wealth at a rate that is 40% faster than that achieved without appropriate tax planning.
In addition, a well-structured tax-deferral strategy can result in sound overall tax management, such as where income recognition is deferred until such time as the taxpayer is in a lower tax bracket (e.g., after retirement).
There are a variety of tax-advantaged alternatives by which (if available to them) a lottery winner can save for the future. These alternatives include certain well-known strategies, such as:
• 401(k) plans
• Simplified Employee Pension Plans (SEPs)
• Keogh plans
• Traditional IRAs
• Roth IRAs
• AND certain lesser known, but nonetheless effective, strategies such as Peachtree’s Asset Advantage®.
As can be expected, there are several factors that must be considered in the course of developing an effective overall financial planning strategy. Since financial planning is necessarily circumstance-specific, before implementing any particular strategy, you are strongly encouraged to seek professional financial and tax advice.
Enjoy your good fortune of winning the lottery!
As a lottery winner, you have many financial options. Peachtree has created a structure that gives you the best of all worlds. For more information and financial options with selling your lottery payments from your lottery winnings, contact Peachtree Special Asset Funding at 1-866-527-5532 ext. 1879
