When receiving their money, the very lucky winners of the Powerball have two different options they can choose from. In most circumstances, when collecting their prize, the winners can choose either a lump-sum cash payment or an annuity that makes payments over the course of 30 years. However, when making this decision, winners must be aware that if they choose a lump-sum, they will receive a lower sum of money than what the Powerball originally was.
Of course, like any other financial decision, there are the benefits and the drawbacks to accepting either a lump-sum or an annuity. Lucky for you, we’ve broken down the key concepts behind each option. So, in the event you find yourself a (very) lucky winner of the Powerball, this article will help you come up with the educated decision of which option would work best for you and your family.
Choosing The Annuity
Here’s what you need to know if you decided to go with the annuity option:
In the event the Powerball winner chooses the annuity option, they are opting out of receiving their winnings all at once and instead, will spread out the payments on a yearly basis. Initially, the winners will receive an immediate payment upon winning, followed by annual payments made over a course of 29 years with a grand total of 30 payments. In an effort to maintain the cost of living, each payment will increase by approximately 5% every year. For example, let’s say the Powerball winnings are $83 million and the winners decided to go with an annuity plan that will spread their $83 million in payments made over a 30-year time period. Their immediate payment will be approximately $1,249,269.00 while their payment in the next year will be $1,311,733.00 and so on and so forth. Each year their payment will increase 5% until their payment reaches $5,142,161.00 in the final year, leaving a grand total of $83 million in a timespan of 30 years. The annuity option is also inflation-protected; in other words–as long as you are smart with your finances–the annuity options eliminates the possibility of going into debt. Basically, protecting you from your own frivolous spending.
Additionally, the Powerball annuity payments are marked as “annuity certain” which means that in the event the winner dies before they have reached their 30 allotted payments, the installments will still be made to their estate and their heirs upon their passing.
Taking a Lump Sum Payment
Surprisingly, it’s quite often that we see the Powerball winners choose the lump sum option–a smaller value–rather than waiting for their winnings to be received as yearly installments. It’s understandable, though; not everyone–who’s just won such a significant amount of money–has the patience to wait on a yearly basis to obtain that money. When the stakes are that high, they want their money almost immediately.
With the availability of instant cash, winners have the ability to do what they want with it at any time. This includes the type of investments that many winners may want to consider investing their money with.
Taxes On Your Winnings
A major factor that most fail to take into consideration is taxes. If you choose the annuity option, you will only be required to pay taxes on the amount of money you receive each year. Whereas with the lump-sum option, winners will be required to pay the taxes off in one whole sum upon obtaining their proceedings. You’ll also have to pay off any taxes that come with investment options such as dividends, capital gains, and interest income each year that you invest. However, many people seem to find this aspect a bit troubling, seeing that it’s not very easy to predict what the federal income tax rate might be; it’s constantly fluctuating.
As you can see, each option has their own set of pros and cons and in the end, it all comes down to what would work best for you and your family in the long run. However, after hearing the endless stories or Powerball winners going broke after choosing a lump-sum option, the annuity plan might just be the smarter option