You Hit The Jackpot — Now Make The Smartest Money Move

Winning the lottery is life-changing. Of course, odds are you won’t — the chance of hitting a Powerball jackpot is 1 in 292 million. For context, your odds of being struck by lightning over a lifetime are about 1 in 15,000.

But if you are lucky enough to catch lightning in a bottle and win, you’re left with a major decision: Do you take the winnings as a lump sum or go with the annuity?

Whether you win $50 million in a state draw or $500 million in Powerball, your payout choice will shape your financial future.

Here’s how to think through your payout options.

Lump sum vs. annuity: Exploring your options

When you win a big jackpot — think Powerball, Mega Millions or even certain state lotteries — you’re typically offered two choices: A one-time lump sum or a series of annuity payments spread out over time (usually 20 to 30 years).

Mega Millions and Powerball both advertise the jackpot based on the full annuity value. The lump sum offer is always lower because it represents the present-day value of future payments. For example, a $400 million jackpot might offer a lump sum of around $200 million — before taxes.

But there are many things to consider before choosing between an annuity or lump sum — taxes being perhaps the biggest factor. (You’ll always pay more in taxes with the lump sum.)

Your age and life expectancy matter, too. If you’re 70 and win the jackpot, waiting 30 years to receive the full payout doesn’t make sense. On the other hand, a 25-year-old with minimal financial experience might benefit more from spread-out payments.

Your cash flow needs, financial literacy, debt levels and long-term goals also shape this decision. There’s no one-size-fits-all answer; the best move depends on your specific situation.

Opting for a lump sum

The lump sum option gives you immediate control. For winners with financial discipline — or the right advisors — it opens the door to strategic investing and long-term wealth opportunities.

You can invest aggressively, start a business or buy real estate — in addition to spending the money however you wish. Bankrate’s guide on how to invest your lottery winnings can give you additional ideas.

Opting for a lump sum can make sense if you:

• Are older and may not live long enough to receive all of the annuity payments. (Your heirs can inherit these payments, but it’s tricky. More on that in a minute.)
• Have a solid team of financial advisors, tax professionals and attorneys.
• Have high-interest debt you want to pay off quickly.
• Need to support family or make big purchases now.

But the risk is real. Without a plan, it’s easy to overspend, get scammed or give too much away too quickly. Many lottery winners have gone bankrupt by mismanaging large payouts. A lump sum offers freedom — and zero guardrails.

Tax implications of taking a lump sum for lottery winnings

Taking the lump sum also means taking the tax hit all at once. The IRS requires a mandatory 24 percent withholding on lottery winnings over $5,000, and all but eight states levy their own state lottery tax on top of that. But you’ll almost certainly owe even more when you file your taxes.

You’ll be pushed into the highest federal tax bracket (37 percent) on income over $609,350 in 2025, which means most of your lottery winnings will be subject to the highest tax rate. And there’s also state income tax to consider.

Here’s an example of how much you could actually receive from a $120 million Mega Millions jackpot as a single filer in Arizona, according to an analysis by USA Mega, a website that calculates lottery returns.

• Cash value (lump sum): $52.8 million
• Federal withholding (24 percent): About $12.7 million
• Additional federal tax due: Roughly $6.8 million more
• State tax (2.5 percent): $1.3 million
• Final amount after taxes: Just under $32 million

Still a life-changing amount — but far from $120 million. And without a solid financial plan, it can vanish faster than you think.

Opting for an annuity payout

An annuity is a financial product that converts a sum of cash into a stream of payments over time, either for a certain number of years or for life.

Compared to a single lump sum, an annuity lottery payout offers stability. The major benefit of spreading payments over 20 to 30 years is built-in discipline. After all, you can’t spend what you don’t have yet. That can be critical if you’ve never managed wealth before.

The annuity payout structure began in part to let lotteries advertise bigger jackpots. By stretching out payments over decades, they could promise more — and manage the cash outflow more predictably.

Annuities also tend to pay out a larger total amount over time because the lottery invests the present-day value of your jackpot in safe government Treasury bonds. The payments typically increase each year to help offset inflation, too. If you opt for the annuity after winning Mega Millions, for example, each payment is 5 percent larger than the previous one.

Opting for an annuity payout can make sense if you:

• Are young or expect to live long enough to collect most or all the payments.
• Don’t feel ready to manage a large lump sum.
• Prefer predictable income and simpler tax management.

For people who worry about outside pressure from friends, family or scammers, an annuity can add a layer of protection. It also gives you time to build financial literacy as your wealth grows.

Despite the overwhelming benefits of opting for an annuity payout, the reality is very few lottery winners go this route. While research on the topic is sparse, a 2011 research paper from The Journal of the Academy of Behavioral Finance found that over 93 percent of Powerball winners between 2003 and 2009 took the lump sum — not the annuity. 

Tax implications of taking an annuity for lottery winnings

With an annuity, you get smaller payments spread out over many years, and you only pay taxes on each year’s payment as you receive it.  

Let’s revisit that same $120 million jackpot from earlier.

• Annuity payments over 30 years: Around $4 million per year
• Estimated annual payout after federal and state taxes: About $2.46 million per year
• Net payout over 30 years: Just under $73.9 million

Compared to the $32 million after-tax lump sum, the annuity results in a larger total, assuming you live long enough to receive all the payments.

But there are caveats. You’re at the mercy of future tax rates, which could go up. Estate tax could be another downside: If you die before collecting all your payments, your heirs can usually continue receiving the remaining checks — but the IRS will still assess estate tax on the value of those future payments all at once. And if you pass away early in the payout period, your estate might not have enough liquid cash to cover that tax bill.

Bottom line

Winning the lottery is rare, but the stakes are high if it happens. Whether you take the lump sum or annuity, the decision will define the rest of your financial life. Your age, financial goals, risk tolerance and support system all matter. 

Whatever you choose, don’t go it alone. Bring in a qualified tax advisor, a fiduciary financial advisor (someone legally required to act in your best interest) and possibly an attorney. Vet your team carefully — bad advice can be just as dangerous as no advice at all.