Where was winning $185M Powerball ticket sold? Should winner take annual payment or lump sum?
On Monday, someone in Connecticut collected $185 million in winnings from the Powerball lottery. The winning numbers were 16-25-27-49-55-17.
The next Powerball draw will begin on Wednesday and will be worth $20 million.
One of the immediate questions, whenever someone wins a giant jackpot, is whether that lucky person should take their winnings in annual payments or accept a lump sum.
Is one better than the other financially? Let’s break it down.
ANNUITY: Powerball winners may choose to receive their prize as an annuity, paid in 30 graduated payments over 29 years. In the case of this winner, they would be subject to a 6.99% state tax given that they won in Connecticut, says USA MEGA, a site analyzing lottery wins.
Pros: The biggest allure of the annuity for any winning or windfall is having a guaranteed income stream for the next 30 years, which largely ensures you never run out of money. For conservative types or those who can’t suppress their spending urges, this may offer some peace of mind.
Cons: But there are risks. It’s possible that the entity making the payout over the 30 years could run out of money. You also could die before enjoying all your winnings. Tax rates, which currently are the lowest in decades for the top tax brackets, also could increase over the next 30 years, and more of your winnings then would go to Uncle Sam rather than into your pocket.
$4 million richer: A veteran used numbers from a fortune cookie to play the lottery.
There is also the issue of estate taxes, says Leon LaBrecque, chief growth officer of Sequoia Financial Group. If you pass away before all installments are paid, your estate with undistributed installments would be taxed at 40% of anything above $11.58 million if you're single or $23.16 million if you're married. “The estate would have to pay the estate taxes, even though the installments haven't arrived,” he said.
LUMP SUM: Powerball winners can accept a one-time cash payout. In the case of a $185 million Powerball jackpot, the winner could take $123.9 million in cash, according to the Powerball website.
Pros: Taxes favor taking the lump sum because rates are low right now. In 25 years, who knows? Financial pros also point out that with a smart investment strategy, you could make more money off the lump sum than the eventual full payout of $185 million. The key is to calculate how much you plan to spend immediately from the cash payout before making any calculations.
“To invest better you need to not only choose a good, low-cost, diversified portfolio,” said Charles Weeks, founding partner of Barrister, “but you will also need to make sure you control your emotions in good markets and bad.”
Cons: The main concern is that winners with little self-control could fritter away their winnings, especially as family, friends and charities look for handouts. There are plenty of stories of celebrities, professional athletes and other lottery winners who have squandered their newfound wealth and ended up in bankruptcy court.
But the sheer size of this jackpot makes it hard for even the most ambitious spendthrift to blow all their winnings.
“It’s all about scale. If it’s a smaller amount, the risk is proportionally higher,” says Douglas Boneparth, president of Bone Fide Wealth in New York.
But you can still make a lot of mistakes with $185 million and still come out ahead.
The verdict? Take the lump sum.
Contributing: John Connolly, NorthJersey.com
This story was originally published on March 21, 2019.