Powerball, Mega Millions jackpots now total $658 million. How to make a spending plan if you win big

  • The $253 million Powerball jackpot comes with a lump sum cash option of $148.4 million. For the $405 million Mega Millions jackpot, it's $235 million.
  • Experts say that while it's OK to splurge on yourself or family friends right off the bat, it's also important to establish boundaries for your spending right away.
  • Generally speaking, withdrawing no more than 4 percent of your money each year would ensure it lasts for at least several decades.

After no one hit all the winning numbers in Wednesday night's Powerball drawing, the jackpot amount has jumped to $253 million.

Between it and the $405 million Mega Millions jackpot, $658 million is up for grabs in the next drawings — Friday night for Mega Millions and Saturday night for Powerball.

A customer buys Powerball tickets at Kavanagh Liquors on in San Lorenzo, California. 
Justin Sullivan | Getty Images
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 $253 million Powerball jackpot, it's $148.4 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 $35.6 million to $112.8 million. You also should anticipate owing more to Uncle Sam at tax time.

More from FA Playbook:
How to maximize your tax benefits from medical expenses this year
Bitcoin investors beware: The IRS wants its piece of the action
What to watch out for on the cannabis investing bandwagon

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.

"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.

Sign Up for Our Newsletter Your Wealth

Weekly advice on managing your money
Get this delivered to your inbox, and more info about about our products and services.
By signing up for newsletters, you are agreeing to our Terms of Use and Privacy Policy.

Annual spending

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.

Contact FA Playbook

  • CNBC NEWSLETTERS

    Get the best of CNBC in your inbox

    Please choose a subscription

    Please enter a valid email address
    Get these newsletters delivered to your inbox, and more info about our products and service. Privacy Policy.

Advisor Council

  • Louis Barajas is founder and CEO of Wealth Management LAB, a fee-only firm specializing in the entertainment industry.

  • Sophia Bera, founder of Gen Y Planning, has been named one of '10 Young Advisors to Watch.'

  • Douglas A. Boneparth, president and founder of Bone Fide Wealth

    Douglas Boneparth is president of Bone Fide Wealth, a Manhattan-based wealth management firm focusing on millennials, young professionals and entrepreneurs.

Latest Special Reports

Financial Advisor Hub