Truth or Myth: The Cash Option Is The Jackpot’s Annuity Amount Minus Taxes

Let’s test your lottery know-how with a jackpot-related question! Truth vs. Myth: The cash option is the annuity amount of the jackpot minus taxes.

That’s a myth.

The cash option is NOT the annuity amount minus taxes. Here’s why.

When you win the jackpot in a game like Powerball® or Mega Millions®, you have two options for how you’ll receive your winnings: cash or annuity.

If you choose the annuity option, you’ll receive 30 payments over 29 years that add up to the annuity amount of the jackpot. The first payment is made when you claim the jackpot and the 29 other payments are made on that same date each year.

To achieve the annuity amount of the jackpot, the lottery invests in securities with the cash in the jackpot from the sale of tickets in the game. The initial amount of money invested plus all the interest generated over the 29 years of payments adds up to the annuity total of the jackpot.

Withholdings are applied to each annual payment that you receive. And if you die before receiving your final jackpot payment, the money goes into your estate. The lottery will then make any remaining payments according to the terms of your estate or as directed by the court.

If you choose the cash option, you’ll receive a one-time payment of the cash in the jackpot from the sale of tickets. You won’t receive any interest over time because the money is not invested. You took the lump-sum cash instead.

Another way of putting it is that the “rest of the money” doesn’t exist in that scenario. Withholdings are applied to the entire amount of the lump-sum jackpot payment.

So to recap: Annuity = cash + interest. Lump-sum = cash only.

Whether you play the lottery or not, we want everyone to have an accurate understanding of how the lottery works. This Truth or Myth series is part of that effort.

Comments

[Mary Neubauer]

Hi, Phil. When a group claims a jackpot prize, all the members have to utilize the same option: cash or annuity. Some can't choose one option while others go with the other. In that case, it's all for one and one for all!

[Phil]

When a group of people own a winning ticket, can some owners choose the cash option and some choose the annuity option?

Thanks.

[Mary Neubauer]

Hi, Dale. Here in Iowa, 24 percent federal withholding and 5 percent state withholding are applied to jackpot prizes. The withholding amounts are set by federal and state law, and the amounts are deducted from a prize amount before the prize is paid. The total tax liability that a winner may have is dependent upon their circumstances in addition to winning the lottery. That's why we always suggest that our winners consult a financial planner or attorney before claiming their prize, so they can receive help from a reputable source and have their ducks in a row!

[Dale]

What are the current taxes taken out on a jackpot?
Does it matter the amount or based on your personal tax bracket?

Thank you.