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Should a lottery winner invest in IRA for tax purpose?

Topic closed. 10 replies. Last post 2 years ago by DELotteryPlyr.

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Inland Empire
United States
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October 22, 2011
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Posted: July 16, 2015, 2:02 am - IP Logged

 I am reading an article on how to avoid maximum tax bracket. One good way is to invest in IRA and this can be a tax write off. So...

 Let's say I won a 5 mil scratcher in CA. The inital federal tax is 25%. I can live with that. But for the rest of 15% for the tax bracket...hmm...

 I would pay 1.25 mil when I receive the check, and have to pay another 0.75 mil next year. But if I invest that 0.75 mil in IRA, then do I avoid paying that for the rest of tax bracket?

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    homestead
    United States
    Member #158182
    August 14, 2014
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    Posted: July 16, 2015, 2:29 am - IP Logged

     I am reading an article on how to avoid maximum tax bracket. One good way is to invest in IRA and this can be a tax write off. So...

     Let's say I won a 5 mil scratcher in CA. The inital federal tax is 25%. I can live with that. But for the rest of 15% for the tax bracket...hmm...

     I would pay 1.25 mil when I receive the check, and have to pay another 0.75 mil next year. But if I invest that 0.75 mil in IRA, then do I avoid paying that for the rest of tax bracket?

    The IRA is contribution is capped at $6K a year. The best thing to do with your winnings is take the lump sum. Once the 25% tax is deducted, invest that money into one single stock, like Disney or Apple and let it grow to around 35% of what you paid for it. From there, use the gains to pay Uncle Sam. This way,you do not have to touch the principal. Just the capital gains that's used to pay the remaining 15% of what you owe.

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      NY
      United States
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      October 16, 2005
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      Posted: July 16, 2015, 3:39 am - IP Logged

      Even if you could invest .75 million in an IRA it wouldn't save you .75 million in taxes. At best it would just make that .75 million non-taxable. That would leave you with 4.25 million in taxable income, so at 39.6% you'd owe 1.683 million. That's still another 443k beyond the 1.25M withholding.

      Depending on whether or not you're covered by a retirement plan at work or if you're self-employed you may be able to make a bigger contribution. Still, even if you could contribute 100k you're only going to save the $39,600 that you'd otherwise pay on 100k. It's not pocket change, but it's not much in the context of taxable income that's 50 times as much.

      This is just one reason to get competent help if you were to actually win a significant amount of money.

        OldSchoolPa's avatar - Lottery-057.jpg
        Gurnee, Illinois
        United States
        Member #49731
        February 12, 2007
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        Posted: July 16, 2015, 3:52 pm - IP Logged

         I am reading an article on how to avoid maximum tax bracket. One good way is to invest in IRA and this can be a tax write off. So...

         Let's say I won a 5 mil scratcher in CA. The inital federal tax is 25%. I can live with that. But for the rest of 15% for the tax bracket...hmm...

         I would pay 1.25 mil when I receive the check, and have to pay another 0.75 mil next year. But if I invest that 0.75 mil in IRA, then do I avoid paying that for the rest of tax bracket?

        You really should consult a team of financial professionals. An IRA is an Individual Retirement Arrangement which merely provides shelter from taxes. A financial professional can cover the caveats and limits. However, if I won millions, I would rather focus on paying taxes due on the winnings and devote time to travel and family while I plan my future endeavors like attending business school, starting a business, etc.

        Get MONEY!!! Winning a JACKPOT lottery is all the HOPE and CHANGE I desire!!!  NOW give me MONEY!US Flag

        The guy who won the presidency in 2008 really won the lottery...he is now millions richer, travels in first class style, and even has a staff that would be the envy of the richest Powerball winner (she has a staff of 2). Every night he goes to sleep, he probably plays the close of Dave Chappelle's Show: I'm rich beyatch!

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          United States
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          March 9, 2006
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          Posted: July 16, 2015, 4:40 pm - IP Logged

          Winnings are not earned income.

            Bondi Junction
            Australia
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            December 24, 2007
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            Posted: July 16, 2015, 8:34 pm - IP Logged

            The IRA is contribution is capped at $6K a year. The best thing to do with your winnings is take the lump sum. Once the 25% tax is deducted, invest that money into one single stock, like Disney or Apple and let it grow to around 35% of what you paid for it. From there, use the gains to pay Uncle Sam. This way,you do not have to touch the principal. Just the capital gains that's used to pay the remaining 15% of what you owe.

            I'm not sure about "one single stock", spread the risk across various industries.

            We all get a lot out of lotteries!

              Bondi Junction
              Australia
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              December 24, 2007
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              Posted: July 16, 2015, 8:43 pm - IP Logged

               I am reading an article on how to avoid maximum tax bracket. One good way is to invest in IRA and this can be a tax write off. So...

               Let's say I won a 5 mil scratcher in CA. The inital federal tax is 25%. I can live with that. But for the rest of 15% for the tax bracket...hmm...

               I would pay 1.25 mil when I receive the check, and have to pay another 0.75 mil next year. But if I invest that 0.75 mil in IRA, then do I avoid paying that for the rest of tax bracket?

              Before doing anything, winners should get independent, professional financial advice. Make sure they are independent, not sales people getting commissions for pushing a product. Don't be afraid to get second opinions.

              We all get a lot out of lotteries!

                Raven62's avatar - binary
                New Jersey
                United States
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                June 28, 2005
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                Posted: July 16, 2015, 11:20 pm - IP Logged

                Winnings are not earned income.

                http://www.irs.gov/uac/Reporting-Gambling-Income-and-Losses-on-Your-Tax-Return

                A mind once stretched by a new idea never returns to its original dimensions!

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                  NY
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                  Posted: July 17, 2015, 12:06 am - IP Logged

                  And? Is that just your way of telling us you don't know the difference between income and earned income?

                    Raven62's avatar - binary
                    New Jersey
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                    Posted: July 17, 2015, 1:36 am - IP Logged

                    And? Is that just your way of telling us you don't know the difference between income and earned income?

                    Is this your way of saying if you win a Jackpot that you'll still be entitled to the Earned Income Tax Credit (EITC)?

                    A mind once stretched by a new idea never returns to its original dimensions!

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                      Maryland
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                      January 2, 2015
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                      Posted: July 17, 2015, 4:51 am - IP Logged

                      I'm not sure about "one single stock", spread the risk across various industries.

                      Yes, you need to be diversified

                      You have done a great job starting your research.  Keep going, keep reading and talking to people.  You will find investments which you are comfortable with.  Just watch out for 'its too good to be true' - it most likely is.