Powerball Annuity vs. Cash: How Does It Work and Which One Should You Take?

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Updated on Monday, January 11, 2021

One of the many decisions you’d have to make if you won the Powerball jackpot is whether you’d rather take your winnings in a Powerball annuity or as a lump sum. Most people want their money now, but don’t cash that check quite yet. You’ll want to think through the two options to make the right choice, as they both come with advantages and disadvantages.

This article covers everything you need to know about selecting either the Powerball lottery annuity versus lump sum if you’re lucky enough to be a winner.

Powerball annuity: How it works

If you win the Powerball jackpot, you can choose to receive the jackpot in an annuity that is paid in 30 graduated payments over 29 years with an annual interest rate of 5%. An annuity calculator can help you determine your payout amounts over time.

As an example, let’s say that the estimated Powerball jackpot is $112 million in the state of California. Using this scenario, your immediate annuity gross payout would be $1,685,761 — before federal and state taxes. Because of the 5% increase each year, the second year you would receive $1,770,049, and the third year you would get $1,858,551. Your annual payments would continue to grow by 5% each year until your final payment of $6,938,820.

Of course, you’d owe taxes on your winnings. This income would put you in the highest federal tax bracket, which is currently 37%. Note that the IRS will automatically take 24% of your winnings, and then you’ll owe the rest when you pay your taxes. You also could owe state taxes, which will vary depending on where you live. New York has the highest rate at 8.82%, while some states, like Tennessee and Texas, don’t tax lottery winnings at all.

Powerball lump sum: How it works

Just like it sounds, the lump-sum option pays out the cash value of the jackpot all at once. In the case of the $112 million Powerball pot, the cash value is $75.4 million.

Unlike the annuity that is taxed as you receive your annual payments, the winner who takes the lump sum pays all applicable taxes upfront. A winning ticket would put you in the highest tax bracket, which is currently 37%, netting you $47,502,000 before state taxes, which vary depending on where you live.

No matter how you decide to take the money, if there is more than one winning ticket, the pot is divided equally. If you’re the sole winner, you get the entire amount.

Powerball annuity vs. cash: Which should I choose?

One prize does not fit all when it comes to the lottery, and the answer to the question of Powerball annuity versus cash is situation-specific. We break down the advantages of the Powerball annuity versus lump sum to help you figure out what’s right for you.

Annuity advantages

  • Easier to manage: It’s not uncommon to hear about lottery winners who go broke just a few years after collecting their prize due to mismanagement of the funds. If you’ve had money trouble before, consider the annuity. “If I meet winners that appear to me to be extremely undisciplined with their investments, I recommend the annuity as a way to protect them against themselves,” said Jason Kurland, a Uniondale, N.Y.-based attorney who has counseled large-jackpot winners, including the anonymous South Carolina winner of the $1.5 billion Mega Millions jackpot.
  • Guaranteed income: Taking the annuity would give you a regular, guaranteed income for the next 29 years, which would pace your spending as well.
  • Tax benefits: With an annuity, you’ll avoid a massive lump-sum tax bill as well as additional taxes on investment gains you’d pay over the years if you were to invest that lump sum.

Lump sum advantages

  • Opportunity for growth: One major reason to take the lump sum is the potential for growth if you invest the money. “If a winner can conservatively invest their lump-sum amount, their fortune will grow at a much quicker pace than if they wait for the annuity payments from the lottery,” said Kurland. “If interest rates go up considerably, the annuity option could become a bit more attractive, but right now, given the low-interest rate environment, it makes more financial sense to take the lump sum.”
  • Potentially lower tax rate: Another reason to take the lump sum is the current tax climate, said Edward Snyder, CFP and co-founder of Oaktree Financial Advisors in Carmel, Ind. “We are at the best situation tax-wise we’ve ever seen,” he said. “Our current tax rate is temporary, though, and rates are set to go up in 2026. The lump sum today would be in the 37% bracket. If you took the annuity, you might be paying higher taxes later.”
  • Estate planning benefits: If the winner is older, the lump sum also offers an advantage for their heirs, said Kurland. “If a winner dies while receiving the annuity payments, their estate could be hit with a huge tax that it can’t afford,” he said. “The tax will be similar for a lump-sum winner, but at least the money will be there to pay it. An estate may not have the luxury of waiting for the annuity payments in order to pay the tax. There have been instances where this actually bankrupted an estate for a winner who chose the annuity payments.”