Should Powerball lottery winners take lump sum prize or annuity payments? We explain

Charlotte Observer (NC)

The Powerball jackpot reached a record-high $900 million after no one claimed the top prize on Saturday’s drawing.

If a winner is announced on Monday, it would be the third-largest Powerball prize ever. The odds of hitting the jackpot are 1 in 302 million, according to lottery officials.

Unfortunately, the winner would also be faced with some pretty hefty taxes if they choose to receive the prize all at once.

The cash option for this jackpot is $465.1 million, according to Powerball. In 2018, the federal tax withholdings for winnings more than $5,000 changed from 25% to 24%, according to a news release from the N.C. Education Lottery, meaning $111.6 million would automatically be withheld from the winner.

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If you had no reduction in income after winning, an additional $60 million would be due to the IRS. If the winner is from North Carolina, another 5.25%, or $24.4 million, would be taken out for state taxes, leaving the winner with around $269 million.

Although federal and state taxes can significantly reduce lottery winnings, there are some benefits to taking the lump-sum payment.

Are lump-sum payments the best option for lottery winners?

If a lottery winner chooses to collect their winnings in a lump sum, it gives them the opportunity to invest in high-yield financial options, like real estate and stocks, financial writer Elaine Silvestrini wrote for Annuity.org, an online resource for information about annuities.

Lump sum payments can also help winners avoid long-term income tax implications, Silvestrini wrote.

However, those who elect to receive their winnings in annuity payments, or payments that are divided and issued over a fixed period of time, can end up with more in the long run.

In 2014, Vinh Nguyen, a California nail technician, was the sole winner of a $228.4 million Powerball jackpot. He chose to receive the money in annuity payments over 30 years, where he will receive the full amount, instead of the lump sum, which would have given him $134 million.

Annuities can also prevent winners from spending all of their money after receiving a lump sum, but since they are fixed payments, winners cannot adjust the payout terms if a financial emergency arises.

Though many believe the government keeps the money, annuity payments are generally passed to a winner’s heirs if they die, according to Silvestrini. In this situation, the remaining assets are distributed to a living beneficiary, or to an estate where the money can be disbursed to a group of beneficiaries.