Is The Powerball Lump Sum Or The Annual Payout Better? Let's Break It Down
As you may or may not have heard, there is a huge amount of money awaiting the most improbably lucky person in America right now. That's right, the United States is once again suffering a case of lotto fever, as otherwise rational people go out and buy a ticket in the hopes of scoring a record $1.5 billion Powerball. But let's indulge the fantasy for a second. If you won, which payment option should you take? The Powerball lump sum, or the annual payout?
It's sort of the quintessential "if I won the lottery" question. Do you want to get less money total but get all of it in one big go, or do you want to accept yearly payments and possibly save on your tax bill? Obviously, it's nobody's choice but yours if you win ― although you'll probably want to seek the help of legal and financial professionals for the process.
While the lump sum vs. annuity argument ultimately boils down to a personal preference ― is there really that meaningful a quality of life difference between more than a billion and hundreds of millions? ― there's no doubt which route is more profitable in the long-term sense.
If you go with the annuity, then you don't get all the money immediately, instead receiving a series of payouts over the course of 29 years. The annuity option is actually where the startling $1.5 billion number comes from. As CNN Money details, that sky-high figure results from investments and interest on the remainder of the unclaimed millions over the course of the 29-year-long wait. But at the same time, you never know what taxes will look like in the future, and your winnings could be subject to higher (or lower) rates.
If you want the whole thing at once, you'll be accepting less from the very start ― the lump sum starts at $930 million, and it's subject to a 25 percent federal tax upfront. This knocks you down to "just" $697.5 million right off the bat, and how much more you lose then depends on your state taxes. For example, if you're in a state that doesn't tax lottery winnings, like Florida or California, then you're golden. If you're in New York, however, you'll be stung by an 8.82 percent additional tax on your winnings, dropping you down to $615,474,000. In either case, the total you'd walk away with would be less than half of the advertised $1.5 billion.
Basically, if you've got the patience and the willingness to wait, it's a more lucrative decision to take the annuity, and the slow-drip of cash could also insulate you from any irresponsible spending habits. I know it sounds impossible, but some people take the lump sum, burn it all up, and don't have anything left. It's all up to you in the end, though. Personally, I don't think I could resist the draw of the quick, robust lump sum. But sadly, that's probably not a choice any of us will ever get to make.