408(k) Plan

What is a Jackpot

A jackpot is a big windfall derived from an act of play. In finance, jackpots refer to large returns on investment harvested over a short period.


Jackpot entered the English lexicon via a variant of nineteenth-century five-card poker that required a player to declare a hand with a pair of jacks or better in order to open the auction. The players contributed a bet before each chord, so a series of hands during which no one could claim anything better than a pair of ten would increase the size of the pot. The meaning has broadened throughout the gaming industry, generally describing situations in which winnings accumulate over a series of times before paying, such as slot machines or lottery games.

The use of the jackpot as a financial term stems from a more familiar extension of its definition to a large and unexpected gain. For example, investors who buy stocks through an initial public offering (IPO) win the jackpot if the company they support experiences a dramatic and rapid rise in the share price, which allows investors to withdraw money with a substantial profit.

Jackpots and their consequences

It’s human nature to dream of winning the lottery, supporting the right horse, or going upstairs to a warm IPO, and these daydreams naturally revolve around what we could do with all these new riches.

Whatever its origin, a financial windfall can generate more challenges than investors can foresee, especially if they do not understand the consequences of receiving a large sum of money at the same time. Those fortunate enough to find themselves rolling cash again may find it difficult to resist the temptation to shop, but their future financial health may depend on it.

First and foremost, jackpots are generally subject to taxes. However, tax treatments vary depending on the origin of the windfall and not all jackpots are paid the same way. For example, some lottery payments offer winners the choice between a lump sum and an annuity payment that offers periodic payments. Liquidation of a lucrative investment position often means taxes on capital gains. Financial planners and tax advisers can play a key role in ensuring that windfall profits are invested appropriately and that individuals set aside enough to ensure they have enough to pay when the day of tax arrives.

After tax planning, financial advisers generally suggest that people who hit the jackpot take their time with impulsive spending on big tickets. Even a big windfall is going to run out, and the time it takes to spend that money may not be as long as you would imagine.

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