Powerball jackpot: is it better to take the cash option or annuity payout?

The Powerball jackpot has once again risen over $1 billion, a life-changing amount of money, and winners are given two options on how they wish to receive their earnings: a lump sum or an annuity plan.

The lump sum option

Those playing should know that while the jackpot advertised is $1.7 billion, after taxes, the figure drops to $756.6 million. The lump sum payment allows a winner to receive all their winning up front. Powerball says that the “cash value” the $756.6 million figure, “is the amount of money required to be in the jackpot prize pool, on the day of the drawing, to fund the estimated jackpot annuity prize.” These amounts are estimates until the drawing because they are based on ticket sales, which can occur up to fifteen minutes before the event. Taking the lump sum will also mean you will be in the highest band of tax income. As of 2020, you’ll likely owe the IRS at least 37% in taxes.

Are there any risks of taking the lump sum?

Yes. receiving such a large amount of money causes severe challenges for many lottery winners. However, if the correct support is identified to help one make a financial plan the lump sum would allow for investments to be made at a greater amount over a longer period of time, which could lead to an increase in the value of one’s winnings.

But this more positive outcome is not always the case. In an interview with CNBC, a lawyer who has experience representing lottery winners, Andrew Stoltmann, said that while “virtually everybody who wins the lottery picks the lump sum distribution,” he thinks that is a mistake. Being able to manage such a large amount of money can be highly disruptive to a person’s life.

The annuity option

The annuity option distributes one’s winnings over a thirty-year period, where one payment is distributed each year.

The winnings are taxed each year as they arrive. If the winnings are spread out over thirty years, you may not be in the highest tax bracket each year, depending on the size of your prize and your other income; keep in mind that any winnings over $5,000 are subject to tax withholding by lottery agencies at 25 percent.

Are there any risks in taking the annuity path?

There is a risk that taxes on lottery winnings could increase as time goes on, which could lead to a lower payout. This option allow for far less flexibility.

Some states, but not all, do allow winners who have selected the annuity option to sell it to receive a lump sum payment. According to an organization dedicated to these types of sales, Cash in Your Annuity, twenty-eight states allow winners to sell their annuities for a lump sum.

What chance is there of winning?

The odds of winning the Powerball jackpot are 1 in 292,201,338, so you’re more likely to win at a slot machine than the grand prize.

To put that into context, there is a 1 in 500,000 chance of being struck by lightning, according to the CDC. That means you will be struck by lightning a whopping 584 times before you win the lottery. There is a much greater chance of being born with an extra toe or finger.