Demystify the math behind taking the lump sum or the annuity payments with a Powerball jackpot win, so you know what to do if you get lucky.
Lumps in your gravy, nobody wants. Lumps in your mattress. Same sentiment.
But when it comes to a winning Powerball ticket, most people would jump at the chance to take a lump sum and start living large. The concept is perfectly intoxicating to entertain.
Not so fast, say financial experts, who advise that slowing down long enough to consider other options may be the right thing to do. Today, we’ll explore the math behind taxes and payouts so you can better understand how much you could take home after a big Powerball jackpot win.
Consider your options carefully for the best outcome
The first thing to understand is that Powerball winners do typically get to choose between a lump sum and an annuity. The first means you’d walk away with your total Powerball prize, less taxes. The latter structures payments over a fixed number of years.
What fits your situation? It pays to know ahead of time in order to help you plan.
Taxes may sway a winner
Lump sums, while highly attractive options, are subject to substantial taxes that could discourage savvy Powerball winners from taking it all at once.
Consider the following scenario from North Carolina in 2023. According to news reports, the winner of a $1.73 billion jackpot in the Tar Heel state that year would have enjoyed a cash option of $756.6 million. A lump sum for that same amount would have net a winner only $437 million after taxes. Big difference. Of course, hundreds of millions versus hundreds of millions is still life-changing.
The upside of lots of cash all at once
At the same time, winners who go with the lump sum stand to celebrate multiple benefits with their choice. All that cash immediately means plenty of capital available for extravagant purchases and investments, including valuable real estate, paying off debts, lavish trips, new cars, and popular stocks.
Long-term tax options may also be reduced by going with a lump sum, according to some annuities experts. Great news, right?
Make more in the long run
On the other hand, financial experts say that annuity payments, understood as payments that are divided and paid over an agreed-on period of time, can benefit a Powerball winner with more earnings in the long run.
Consider the noteworthy case of a California man who wound up being the sole winner of a $228.4 million Powerball jackpot in 2014. Vinh Nguyen decided to receive his winnings over 30 years. That decision meant Nguyen would receive the entire amount of his jackpot rather than a much-reduced amount of $134 million, according to calculations at Powerball that year.
Slow and steady wins the race
Another upside to annuities is that annuities, by definition, prevent the pitfall of spending all your sudden wealth at once. Historically, many Powerball winners have started out with good intentions, but fallen prey to quick spending and wound up broke. An annuity would slow spending for a winner who may need time to adjust to their good fortune.
What's the downside?
Annuities are not flexible, say financial experts, meaning that the terms can't be adjusted to adapt to a financial emergency that may arise.
Inherited wealth considerations
If you do choose to go with an annuity and are worried that your heirs may not get to keep the payments in the event of your death, don't. The common belief that the federal government keeps annuities upon the beneficiary's death is just that: A belief, with few exceptions, say experts.
What fits your style? Be in the know before you decide
At the end of the day, whether or not you choose a lump sum as a winner or decide to go with an annuity may come down to your unique and very personal style. Educate yourself so you’re ready to make that all-important decision - take the Powerball jackpot lump sum or spread it out over annuity payments.