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Updated on Thursday, August 8, 2019
Feeling lucky? You’ll need luck — and lots of it — to win the Powerball lottery jackpot. The odds of taking the grand prize are 1 in more than 292 million, according to Powerball. While those chances are pretty slim, someone has to win. It could be you, right?
Let’s daydream for a moment and say you do hit it big. One of the many decisions you’d have to make is whether you’d take your winnings in a Powerball annuity or 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 wisely to make the right choice.
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 of this writing, the estimated Powerball jackpot is $112 million. Using this scenario, your immediate annuity gross payout would be $112 million — 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 vs. cash is situation specific.
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. “I call these winners my ‘drunken sailors.’ If they are talking about buying mansions, expensive cars, vacations for all of their friends and family in the first month, perhaps an annuity is the way to go.”
Edward Snyder, CFP and cofounder of Oaktree Financial Advisors in Carmel, Ind., agreed. “For someone who might blow through the money, the annuity makes sense,” he said. “You could still blow through it every year, but it will take you 30 years.”
Taking the annuity would give you a regular, guaranteed income for the next 29 years, which is a definite advantage. And 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
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.”
Another reason to take the lump sum is the current tax climate, said Snyder. “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.”
If the winner is older, the lump sum also offers an advantage for his or her 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.”
And then there’s the matter of control. If you take the lump sum, it’s up to you to decide how to invest it.
The Powerball is “annuity certain,” which means if the winner dies before receiving all of the installments, the balance of the prize is transferred to his or her estate. Upon receipt of a court order, the balance will continue to be paid to the heirs each year.
If you win the big jackpot, you must claim your prize at the lottery headquarters for your state. Smaller prizes can be claimed at regional offices.
Depending on the size of your prize, the expiration date varies. If you win the Powerball grand prize, however, the expiration date is 90 days to a year, depending on your state’s rules.
If you live in Arizona, Delaware, Georgia, Kansas, Maryland, Michigan, Texas, North Dakota, Ohio and South Carolina, the answer is yes, if the winnings are above a certain amount. New York allows lottery winners to create an LLC through which to accept the funds, to provide anonymity. If you live anywhere else, your name will be released.
Unfortunately, yes. Scammers reach out to potential victims by email or phone to try to convince you that you’ve won a prize and must pay a fee to collect it. Lottery officials will not contact you to inform you that you’ve won a prize, unless you specifically entered an official lottery promotion or contest.
Scammers are also creating social media posts that say Powerball is giving away prize money on Facebook. These notices are also fraudulent. Lotteries do not contact prize winners through Facebook, unless you specifically entered an official lottery promotion or contest.