When you win a Powerball jackpot, you have two options: you can accept your prize as 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?
Unsurprisingly, there's no one right answer. The right choice for your situation depends on many factors including your age, your state of residence, your current and estimated tax rate, and how well you handle financial pressure. Here's a deeper look at the pros and cons of the Powerball jackpot payout options.
How the Value 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 value 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. This involves companies bidding to provide the annuity.
All this means that 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 you'll 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 an amount that already has taxes deducted from it.
If you select the annuity payout option, the Multi-State Lottery Association will issue you one payment immediately, then invest the rest of the funds, pre-tax, for you in an annuity that gives you a payout every year for the next 29 years. Each year's payout will be 5% higher than the one from the year before, to account for inflation. Each year, you'll pay taxes on the sum you receive.
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.
What does that mean? 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% - 4%, then your investment will usually outperform the annuity.
You can also choose an investment that gives you more flexibility in how your funds are 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 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 you don't handle it 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. 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 pay less in taxes if you choose an annuity. You won't have the risk of making a poor investment and losing all your money at once, and your estate will receive any remaining funds, should 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 by disappearing faster than you expect.
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, it will be difficult to get access 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 will give you individual advice that applies to your personal situation.
You have between 90 days and a year before you need to cash your ticket. 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.
Selling Lottery Prizes
What can you do if you choose an annuity payout and then, unexpectedly, have a strong need for your cash? You can't just change your mind and ask for a lump payment after all.
Some financial institutions purchase your remaining payments — for a discount, of course.
While this gives you a way to access your jackpot faster than waiting for your annual annuity payments, you should avoid it, if at all possible. For one thing, the process isn't simple. The courts must approve of your jackpot sale, which makes it a long, and potentially costly, experience. Plus, the bank buying your payouts will only pay a fraction of what they are worth. And they might charge you fees on top of that discount.
If you're in urgent need of money, taking out a loan against your annuity payments might be a better option. Because your payouts count as collateral, you might get a lower interest rate than you would with a standard loan.
The best option, of course, is to budget carefully and not think of your lottery jackpot as unlimited money, no matter how large the value. A good lottery team can help you do this.
This article is not intended to offer professional tax advice. Always use a professional tax advisor for questions about your taxes and trust those professionals more than anything you read online.