Winning the lottery. Receiving an unexpected inheritance. Cashing out a retirement plan. These financial events can be a welcome occurrence in your financial life, but the fact of the matter is, each of them raises serious financial questions.

For many people, a sudden influx of money can be overwhelming. It can be tempting to start spending it, or follow the first advice offered by a friend or family member. If you are fortunate enough to find yourself in this situation, you'll likely have to navigate a number of potential pitfalls. How well you sidestep them can make a real difference in your long-term financial success.

Understand the Tax Impact

Taxes on Lump-Sum Distributions
Receiving a lump-sum distribution from your employer's retirement plan when you change jobs or retire might feel like a financial windfall. But the truth is, the cash you receive isn't pennies from heaven - it's your hard-earned retirement nest egg. You should be as careful managing it now as you were building it. You might be tempted to pocket or spend the proceeds instead of rolling it into a tax-deferred account, but that could be pricey. Twenty percent of the amount distributed to you will be withheld for federal income taxes, and state income tax withholding also may apply. Plus, you could owe an additional 10% penalty for early withdrawal if you don't meet minimum age requirements. Younger workers are less apt to roll over their retirement account proceeds, even though small sums can grow substantially over time. Find out about your retirement plan options from the employer who distributes your plan proceeds to you.

Taxes on Inheritances
If your windfall is an inheritance, remember that taxes may take a bite out of your proceeds. On estates valued over $2 million, the IRS collects estate taxes, which will be deducted before you receive your payment. The U.S. government does not levy inheritance taxes on the beneficiaries who receive property from an estate, but state and local taxes may apply. Spouses and children of the deceased often are taxed at lower rates than other heirs. Be sure to check the laws in your state of residence.

Taxes on Lottery Winnings
If you've struck it rich in a lottery, your tax hit could be substantial. If you receive a lump-sum payment (currently only available in a handful of states), you'll fork nearly half of it over to Uncle Sam in taxes. If you receive your payments over time, rather than in a lump sum, the IRS withholds 28% federal income tax from each payment you receive. You also may have to pay additional income taxes when you file your return.

Make Your Money Last

Stay Ahead of Inflation
Regardless of the size of your windfall, chances are you'll need to make it last. The main long-term financial risk you face may not be stock market fluctuations. You could face a greater risk of outliving your assets if the rate of return on your investments does not keep pace with the rate of inflation. Inflation has averaged about 3% annually over the past 50 years. If prices rise 3% per year, in 20 years it will take $1,000 to buy what $554 buys today. Looked at another way, a 3% inflation rate means it will take more than $108,000 in 20 years to equal a $60,000 annual salary in today's dollar.

Allocate Carefully to Balance Risk and Reward
Many experts consider asset allocation - how you divide your investments among asset categories to help balance risk and potential reward - to be one of the most critical components of successful investing. In fact, research has shown that 90% of a mutual fund's return over time was based on how its assets were allocated, not on its specific investments.1 The same can be true for your portfolio. If you invest wisely and receive an average annual rate of return of 10%, you can double your money about every seven years. That can go a long way in preserving your windfall.

Asset Allocation's Impact on Portfolio Performance

Learn more about what to do if you inherit a windfall of money by looking at this pie chart.

1Source: "Does Asset Allocation Policy Explain 40, 90 or 100 Percent of Performance?" by Roger G. Ibbotson and Paul D. Kaplan, ©2005 Association for Investment Management Research.

Seek Guidance

Before doing anything rash with a large sum of money, review your financial picture. Identify your goals, evaluate your risk tolerance and create a long-term plan for your money. Consider enlisting professional help. A tax expert or financial advisor can help you make choices that are right for you.

At the same time, it's important to note that advice is seldom free, and there's lots of it out there. Make sure you understand the fees and expenses associated with advisors and each investment they recommend.

This information is for educational purposes only and is not intended as investment advice.