Winning the lottery is a dream for many people. The chance to win millions of dollars in one shot is an alluring prospect. But if you do win the jackpot, how much money would you actually get to keep? The answer depends on several factors.
When you win a big lottery jackpot, you are given a choice between receiving the money in either an annuity paid out over several decades or a reduced lump sum paid all at once. If you opt for the lump sum, the amount you receive will be significantly less than the stated jackpot amount. This is because the advertised jackpot is based on the annuity option.
There are a few key reasons the lump sum is less:
Taxes
Like regular income, lottery winnings are subject to taxes. In the United States, the top federal tax rate on lottery winnings is 37%. Some states also tax lottery winnings, with rates varying from 1% to 8%. These taxes are immediately withheld from the lump sum payment, significantly reducing the amount the winner walks away with.
For example, if you won a $1 billion dollar jackpot and chose the cash option, about $370 million would immediately go to federal taxes. You may owe even more at tax time if you underpaid.
Early Withdrawal
Annuity jackpots invest the bulk of the prize money and pay out a small portion each year over several decades. When you choose the lump sum, you bypass all the future invested earnings you would have received through the annuity.
For a $1 billion annuity prize, the actual cash value may be only $500 million currently available if taken as a lump sum. You lose out on the time value of money if you opt for the quick cash.
Third Party Settlements
It’s common for big lottery winners to settle with a third party company to pay the full lump sum amount immediately in exchange for the rights to the future annuity payments. However, these companies take a cut of as much as 40% for their service.
For example, for a $300 million annuity prize, the lump sum cash value may be $180 million pre-tax. But if you settle for the full $300 million from a third party, you may only receive $180 million after the company takes their 40% cut.
So between federal taxes, bypassing future earnings, and settlement cuts, the lump sum payout ends up being much less than the stated jackpot amount. But exactly how much less?
Lump Sum Amounts
The amount of money you will receive in a lump sum lottery payout depends primarily on two factors:
1. The Jackpot Size
The advertised jackpot is always based on the annuity option. The bigger the jackpot, the greater the difference between the annuity and the lump sum. Bigger prizes have larger invested earnings you would forgo by taking the cash up front.
For example:
| Jackpot | Annuity | Lump Sum |
| $1 million | $1 million ($50k/year for 20 years) | $600,000 (pre-tax) |
| $100 million | $100 million ($5M/year for 20 years) | $60 million (pre-tax) |
| $1 billion | $1 billion ($50M/year for 20 years) | $500 million (pre-tax) |
For a small $1 million prize, the lump sum is 60% of the annuity amount. But for a huge $1 billion prize, the lump sum is only 50% of the annuity! The bigger the jackpot, the higher the percentage you lose by taking the cash option.
2. The State You Play In
Different states have different rules regarding their lump sum payouts. Some states make you choose between the annuity or a reduced lump sum at the time you win. Other states mandate that winners can take the full advertised jackpot amount as a lump sum if desired.
States that offer the choice up front usually have lower lump sums, while states that guarantee the full amount have higher taxes to compensate.
For example, if you win a $100 million jackpot:
| State | Lump Sum Rules | Pre-Tax Lump Sum |
| California | Reduced Lump Sum Option | $47.8 million |
| Pennsylvania | Guaranteed Full Jackpot | $100 million |
| New York | Reduced Lump Sum Option | $58.8 million |
California only offers the reduced cash value up front, while Pennsylvania guarantees the full advertised amount. New York falls somewhere in between with a higher lump sum than California but still lower than the full jackpot amount.
So if you want the chance to take home close to the full jackpot amount in cash, it’s best to play the lottery in states like Pennsylvania, Georgia, Michigan, New Jersey, and Texas. States like California, New York, Florida, and Illinois pay substantially lower lump sums.
Factors That Reduce the Lump Sum
Once the pre-tax lump sum amount is determined, the money you actually get to keep is reduced by a few more important factors:
Federal Tax Withholding (24-37%)
As mentioned, federal taxes take out a big chunk. The IRS mandates that 24% must be immediately withheld for federal taxes. However, the top federal tax rate of 37% applies to lottery winnings over $1 million, so you should expect to lose around a third of your lump sum to federal withholding.
Some winners who choose the cash option end up owing additional federal taxes at the end of the year if their total tax liability exceeds the amount already withheld. Proper planning is key to avoiding this.
State Tax Withholding (Up to 8%)
In addition to federal taxes, some states tax lottery winnings. State income tax rates on lottery winnings range from 1% in states like Michigan and South Dakota to as high as 8% in states like New York and Maryland. This withholding happens immediately and reduces your lump sum payout.
Third Party Settlements (Up to 40%)
As mentioned previously, it’s common for big jackpot winners to settle their annuity payments with a third party company in exchange for an immediate full lump sum payment. However, these companies take a significant cut, typically 20% to 40%.
So if you settled a $300 million annuity for the full $300 million lump sum amount, you may only actually receive $180 million to $240 million after the company takes their share. Make sure to read the fine print if pursuing this option.
Miscellaneous Expenses
Additional deductions may come out of your lump sum for court judgments, child support, money owed to others, and other random expenses accrued. While usually small compared to taxes, these costs can nick away at winnings too.
Net Lump Sum Amounts
Putting it all together, here are some examples of approximate lump sum amounts players in different states might take home after taxes and other reductions:
For a $1 billion Powerball jackpot:
| State | Pre-Tax Lump Sum | After Taxes (37%) | After Settlements (30%) | Net Lump Sum |
| California | $496 million | $313 million | $219 million | $215 million |
| Pennsylvania | $1 billion | $630 million | $441 million | $437 million |
For a $500 million Mega Millions jackpot:
| State | Pre-Tax Lump Sum | After Taxes (37%) | After Settlements (30%) | Net Lump Sum |
| New York | $304 million | $192 million | $134 million | $133 million |
| Texas | $500 million | $315 million | $221 million | $219 million |
As you can see, even for the same advertised jackpot, the net lump sum amount can vary dramatically based on where you play and win. Of course, no matter which state you play in, you’re going to end up with a life-changing amount of money from a big lottery jackpot. But it’s good to understand how much cash you can realistically expect to take home if luck is on your side.
Should You Take the Lump Sum or Annuity?
If you beat the enormous odds and hit a jackpot, you’ll need to decide between taking a smaller lump sum payment up front or the full amount distributed over several decades. There are pros and cons to consider for each option:
Lump Sum Pros
– Receive your winnings immediately to use as desired
– Flexibility in managing the money yourself
– Keep it invested to possibly grow even higher
– Avoid restrictions some annuities place on winners
Lump Sum Cons
– Smaller than the annuity (sometimes up to half as much)
– May be taken advantage of by friends, family, scammers, etc.
– Winnings may be quickly spent/wasted
– Large tax hit all at once
Annuity Pros
– Larger overall amount (full advertised jackpot)
– Steady stream of income for life
– Lower annual tax hit spread over time
– Forced to save due to annual payments
Annuity Cons
– Must wait decades to receive full amount
– No flexibility or control over the money
– Payments cease at death in many cases
– Payments are fixed and lose value over time with inflation
There are good arguments on both sides. The right option comes down to your specific situation. If you have the discipline to manage a large lump sum wisely, that route provides more control and flexibility. But for winners who may struggle with self-control, the forced savings of an annuity can be a better path.
No matter which payout method you choose, the most important thing is to spend time planning and consulting experienced financial advisors before claiming your prize. Don’t let the excitement rush you into decisions you’ll come to regret. Make smart choices and you can turn your lottery millions into a lifetime of financial security.
Frequently Asked Questions
Here are answers to some common questions about lump sums:
How do third party settlement companies work?
Settlement companies offer immediate cash to lottery winners in exchange for the rights to their future annual payments. The winners don’t have to wait decades to get their winnings but give up a portion (typically 20-40%) to the settlement company as a fee. Settlements allow winners flexibility but reduce the total amount received.
Are state lottery headquarters the ones who pay out prizes?
No, lump sum lottery prizes are actually paid out by insurance companies who insure the prizes. State lottery organizations receive a portion of ticket sales to fund public programs and services. But they transfer liability for jackpot payouts to insurance companies. So big prizes are funded and paid by the insurer.
Do you still owe state taxes in your home state if you win in another state?
Unfortunately yes, most states require you to pay state income taxes on lottery winnings even if you won in a different state. Some states provide credits to offset taxes paid to another state. But you can expect to owe taxes in your home state regardless of where you purchased the ticket.
What if you split the jackpot with other winners?
If two or more winning tickets match the same jackpot numbers, the prize is split evenly amongst them. So if you split a $1 billion jackpot two ways, you and the other winner would each receive $500 million pre-tax. Jackpot splitting is becoming more common with the odds of winning so enormous.
Can lottery winners remain anonymous?
In some states lottery winners can remain anonymous by claiming prizes through a trust or other legal entity. However, others require winners to participate in a press conference and publicize their name/photo. You may be able to keep some details private but total anonymity is not always possible.
Conclusion
While winning a massive lottery jackpot is life-changing, buyers should be aware that lump sum payouts are much smaller than the advertised prizes suggest. A combination of taxes, missed investment income, settlement cuts, and other deductions can reduce lump sums to just 30-60% of the annuity amount. Do ample research ahead of time so you understand exactly how much you will take home after-taxes and can plan accordingly. With proper financial management, even reduced lump sums can be turned into lifelong security.
