Cash vs Annuity
Powerball winners have a big decision to make once they win the jackpot. They have 60 days to opt to receive their winnings in 30 annual payments over 29 years or to take a reduced cash lump sum, which represents the money available at the time the jackpot is won. The annuity amount is the value of the lump sum after 29 years of investment. Both options are liable for tax and choosing which method is preferable to you is entirely down to your personal circumstances. The cash option has proved far more popular with players in recent years, with only five jackpot winners between 1999 and the start of 2016 opting for an annuity.
Here are the points in favour of each.
- You receive a big injection of money into your bank account and you don't have to wait to buy a new house, car or a tropical island if you wanted to do so. Having the cash in one go, even though it's less than the advertised jackpot, means you don't have to seek out credit for big purchases.
- Some people say it is possible to earn a return that is larger than the annuity amount by investing the cash sum. This should only be undertaken after seeking out financial advice, as it involves a high level of risk. In addition, you will be investing an after-tax sum, as opposed to the lottery, which invests the full amount to create the annuity.
- If you are older, setting up a plan for payments over 29 years may not be practical, and you may be more interested in making the most of the money while you can.
- An annuity guarantees a revenue stream for you so you can make the most of your good fortune and manage it responsibly over a long period of time.
- You receive a significantly larger amount of money over the life of the annuity as opposed to taking the cash option.
- It is possible to pass on an annuity to relatives after you die, with the ability to have it cashed in and distributed with the rest of your estate. However, anything above $5.45 million will be taxed at 40 percent in addition to any death taxes in place in your state.
- Being paid in smaller installments rather than in one lump sum can reduce taxes applicable to your prize money, as it may not place you in the top tax bracket like the cash option inevitably will.
You should always take expert advice before making such a big decision, as this is a complex issue. Some careful thought early on could help you live your life as a new millionaire to the fullest without worrying about the money running out prematurely! Learn more about the awards on offer at the Powerball Prizes page.