Should You Take a Lump-Sum Payment When You Win the Powerball Jackpot?
Powerball Winners Have Two Payout Options. Which Should You Choose?
When you win a Powerball jackpot, you have two options: you can accept your money in a one-time lump sum payout, or you can receive it as an annuity paid out over a 30-year period. But which one is best for you?
The right choice will depend on many factors including your age, your state of residence, your current and estimated tax rate, and how well you handle financial pressures. Here is a deeper look at the pros and cons of each of the Powerball jackpot payout options.
How the Amount of Your Powerball Jackpot Is Determined
When you enter a Powerball drawing with an advertised jackpot of $650 million, you would expect to receive $650 million if you win. But your actual payout is more complicated.
Before the exact amount of your Powerball jackpot can be determined, ticket sales must be verified and, in the case of an annuity payout, the annuity must be set up through a bidding process. The final amount of the jackpot can vary significantly from the advertised amount.
If you take the cash payout, you will receive the resulting jackpot amount and will be required to pay taxes on the entire amount. Unlike with sweepstakes taxes, gambling winnings like Powerball jackpots will have the Federal and state (if any) taxes withheld from them, so you'll receive the post-tax amount.
If you select the annuity payout option, the Multi-State Lottery Association will issue you one payment immediately, then invest the pre-tax funds for you in an annuity that will give you a payout every year for the next 29 years. Each year's payout will be 5 percent higher than the year before to account for inflation. You will pay taxes on the sum you receive each year.
Pros and Cons of the Lump Sum Powerball Payout
The biggest pro of taking the lump sum payout is that you have full control over your money. However, the biggest con of the lump sum payout for your Powerball jackpot winnings is also that you have full control over your money.
How does that work? If you take the lump sum, you suddenly have a large amount of money at your fingertips. If you can invest it at a reasonable rate of return, like 3 to 4 percent, then your investment will usually outperform the annuity.
You also have more flexibility in terms of how your investment is distributed. You can pick how much of the money you receive every year, whether you can access the funds for emergencies, who will receive the funds if something happens to you, which types of investment you support, and more.
On the other hand, having a great deal of cash available at your fingertips can have disastrous consequences, as many lottery curse victims learned. A huge jackpot can seem like an endless source of money, but there are costs involved and the money can run out faster than you imagine if it is not handled properly.
Additional concerns include that the jackpot you receive will be smaller overall than if you took the annuity option (though smart investing could make up the difference) and that, depending on the amount of your jackpot, you may end up paying more money in taxes when the amount you have to pay is not spread out over 30 payments.
Pros and Cons of Choosing the Annuity Option for Your Powerball Payout
Choosing an annuity takes some opportunities for making more money with your jackpot out of your hands, but it also removes much of the risk. And you end up with a hefty guaranteed income for 30 years, which could free you from having to work for the rest of your life.
Depending on your tax situation and the size of your jackpot, you might end up paying less in taxes to Uncle Sam if you choose an annuity. You won't have the risk of making a poor investment and losing money, and your estate will receive the rest of the money if you die before the entire amount has been paid out.
You also have some protection from people who prey on you for your money, as well as built-in limits on the amount you can give to charities, family members, and friends or even splurge on yourself. This can ensure that your big win doesn't turn into a big disaster.
On the downside, if you don't live out the full 30 years of the annuity, you won't get to enjoy all of your winnings. And if you have an emergency that calls for extra money, you will have to jump through hoops to get to it.
So Should You Choose the Annuity or the Lump Sum Payout When You Win Powerball?
Before you decide, before you even claim your Powerball winnings, you should consult with professionals who can give you advice that applies to your personal situation. You have between 90 days and a year's time before your ticket needs to be cashed. Check the back of your ticket for the deadline, which varies by the jurisdiction in which it was sold. Sign your ticket, put it somewhere safe (like a safe deposit box) and get your ducks in a row before you cash it in to make sure that you don't make any regrettable mistakes.