The U.S. Powerball has reached a new world record – US$1.5 billion. If you happen to win the big one experts say there are steps you should take to protect your new fortune.
So what’s the first thing you should do if you win the lottery or receive a large cash windfall? David Trahair, a chartered professional accountant in Toronto, says while it’s not the most exciting idea, the first thing people should do is pay off debt.
“If I won it, I would list all the debt I’ve got and pay it off as soon as I could,” Trahair said. “Start with the debt with highest interest rates. Anybody with revolving credit card debt, the first thing they should do is write a cheque or transfer the money and pay off their credit cards.”
WATCH: Canadians can’t beat American taxman after winning Powerball lottery
As for mortgages, Trahair says fixed rate mortgages keep people from paying them off at once.
The second step should look at to maximize registered retirement savings plan (RRSP) contributions, and tax free savings accounts which now have a yearly contribution limit of $5,500.
The next challenge is looking for a qualified financial planner to help manage your money.
“Once a person wins their names will become public and they will be hounded by people wanting to look after their money,” he said. “That’s the tricky part is finding somebody who is good, qualified, with reasonable fees and will do an independent job for them.”
Trahair says the lucky winner should wait until everything else is taken care of before buying luxury items like a vacation or a new car.
Larry Moser, of BMO InvestorLine, says it can help to have a cooling off period of 30 days after you win the lottery or inherit money.
“Have a conversation with your significant other about what this money is for,” said Moser. “What you are trying to do with this money? How long you want this money to last, who you want to share it with, if you’re going to continue to work? These are all questions you should answer before spending that money.”
Dividing winnings with friends and family is something many people considered when playing the lottery. Moser advises picking a percentage.
“There has to be a limit to the generosity … people have to think ‘what percentage of my new found wealth am I willing to part with?’” he said. “No matter how much you win, having a financial plan and something in writing is always a good idea.”
The tax implications of investments should also be considered as safer Guaranteed Investment Certificates or GICs are taxed at the highest rate, where long term investments like stocks are taxed at the lowest level, says Moser.
He adds that having a plan in place can help deal with anyone who may “come out of the woodwork” if you win.
“People come out with their hands open asking for money, there’s instances of fraud, people very aggressively asking you for money even though they don’t know you,” Moser said.
Canadians are flocking across the border to grab their Powerball tickets. In Toronto, a bakery is dishing out some serious dough to customers wanting to cash in on the jackpot by giving away tickets for anyone spending $20 or more on baked goods
While the current jackpot is listed at $1.5 billion, a sole winner would only get that much if the person received 29 annual payments. Winners can also choose the cash prize, which is the total amount currently up for grabs, but that is just over US$900 million, or CAN$1.3 billion.
Sabina Mexis, a Toronto tax lawyer, says while Canada doesn’t impose a tax on lottery winnings the Internal Revenue Service imposes a 25 per cent withholding tax for U.S. residents and 30 per cent for non-U.S. residents.
“There are limited ways to get the taxes back… for the most part you probably won’t be able to get the withholding taxes back,” she said. “If you have gambling losses that are provable then you can apply those losses against the tax and you can get a refund for some of the withholding tax.”
The astronomical chances of matching all six numbers to win the jackpot are one in 292.2 million.
*With a file from Mark Carcasole
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