GREENSBORO, N.C. (WGHP) — As the Powerball jackpot smashes another record and soars to an estimated $1.9 billion, you may be wondering what a win like that would actually look like.
When you win the lottery jackpot, you’re given a choice between a lump-sum payment or an annuity paid out over nearly three decades. Most lottery winners opt for a lump-sum prize. No one has chosen the annuity option since 2014, according to Axios.
According to the North Carolina Education Lottery, a winner that chooses the lump-sum payout for this jackpot would end up getting $929.1 million before taxes. The annuity, on the other hand, would pay out the full $1.9 billion over 29 years.
How is the payout size calculated?
To understand the discrepancy between the lump sum and the annuity, it’s worth knowing what exactly goes into that estimated jackpot.
The amount of the “advertised Grand Prize estimate” isn’t as simple as taking a percentage of total sales. The Multi-State Lottery Association says it involves “many factors.” The biggest two are sales and what they refer to as “the annuity factor.”
“The annuity factor is made up of interest rates for securities purchased to fund prize payments,” the Powerball website says. “The higher the interest rates, the higher the advertised Grand Prize. You might not realize that an economic reality like interest rates impact even the Powerball jackpot, but they do!”
The annuity allows you to collect your winnings in 30 payments over 29 years, but those payments are not divided into 30 even chunks. Each payment is supposed to be 5% larger than the last.
Assuming that the jackpot total is exactly $1.9 billion, your first payment would likely be in the ballpark of $28.6 million. Your second, with another 5% tacked on, would be about $30 million. By that math, your 30th and final payment would end up at around $117.7 million.
For the winner, that 5% annual increase is fixed. But for lottery leaders, it’s all about federal interest rates.
While you may be getting a static 5% increase each year, the lottery is paying you through government bonds, which continue to pick up interest based on federal interest rates over those 29 years. The Powerball commission has to keep those federal interest rates in mind when they’re determining the grand prize total.
While it may be enticing to go for the full $1.9 billion annuity over the reduced lump sum, you have to remember that you wouldn’t get your final payment until 2051, and that money may not go as far then as it does now. USInflationCalculator.com says that a product that went for $100 in 1993 (29 years ago) would cost about $205.40 in today’s money.
And if you’re worried about what will happen to your annuity if you die before the 29 years are up, there’s good news. According to Powerball, if a jackpot winner dies before receiving all annual installments, “the balance of the prize will be paid to the winner’s estate. Upon receipt of a court order, annual prize payments will continue to be paid to the winner’s heirs. Other provisions may also apply depending on the laws of the lottery paying the prize.”
The Powerball Finance and Audit Committee determines how much the cash option is worth by multiplying the overall prize amount “by a discount value” that they set before each drawing.
This time around, that cash value is $929.1 million, less than half the amount you would get through the annuity. But, as they say, one in the hand is worth two in the bush.
While that $929.1 million is a far cry from the $1.9 billion you thought you were getting, you still have ways to turn your lump sum into more money through your own investments. A bit of clever investing and you could, theoretically, end up turning that lump sum into much more than $1.9 billion — or you could end up losing it all. At that point, the ball is in your court.
What about the taxes?
Taxes on the lump sum payment are pretty straightforward, but depend on where you live.
Let’s say you win and decide $929.1 million is plenty, opting for the one-time payment. You can expect to say goodbye to about a quarter of that right away, as 24% will be withheld for federal taxes ($222.984 million).
It may not end there, however, as the windfall could raise your tax rate to the maximum 37%, which kicks in for single taxpayers making over $539,00 in 2022, and married couples making $647,850. Those numbers will jump up to $578,125 and $693,750, respectively, next year.
If you can’t find a way to lower your tax bill by offsetting that income with charitable donations, for instance, you would face an additional $120.78 million owed to the IRS.
If you’re a resident of Alabama, you won’t be paying any additional taxes to the state. Alabama is just one of 14 states that don’t tax lottery winnings. States like North Carolina take 5.25%, and New York withholds the most: 8.82%.
If you choose the annuity, you may be taking a risk. Unlike the lump sum, you don’t pay your taxes on it all at once. If tax rates go down in the future, that just means you get to keep more of your winnings. That said, if tax rates go up, you may find yourself wishing you had cut your losses at the lump sum.