A sign outside a Chicago convenience store Wednesday shows the winning amounts for lottery games including $550 million for the Powerball jackpot.(Photo: Scott Olson, Getty Images)
The first thing a Powerball winner should do: Take a deep breath.
Then find a private place -- where neighbors won't hear you -- and scream your lucky head off.
Once you've gotten that out of the way, you've got some big decisions to make. The first: Lump sum or annuity?
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Take the lump sum, says Mark Bass, a financial planner in Lubbock, Texas. One reason is purely mathematical.
The
current estimated pre-tax jackpot is $550 million, doled out in 30
payments. If you want a lump sum, you'll get $360.2 million. (If you die
before all the payments are made, your heirs get the remaining
payments).
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Why
the difference in the lump sum and the 30-year payments? The $550
million is an estimated annuity payment, which is based on the actual
lottery pot plus interest earned from U.S. government securities.
A
lottery official said late Wednesday that the jackpot increased to
$579.9 million by the time of the drawing, making the cash option $379.8
million.
Interest rates are so low now that you should opt for
the lump sum, Bass says. The 30-year Treasury note currently yields just
2.8%. You can probably earn better returns than that in the next three
decades.
You'll owe taxes in the year you claim your prize, not
the year you win it, says John Hagerty, spokesman for the Virginia
lottery. How much time you have before your ticket expires depends on
the state in which you purchase it, according to the Powerball website.
If
you do decide to take the lump sum, do it this year. "There's a strong
possibility that tax rates will be higher in 2013 than 2012," says
Melissa Labant, director of tax advocacy at the American Institute of
CPAs. Should Congress fail to act, the highest tax rate will rise to
39.6% from 35% now.
The lottery will withhold 25% federal tax, as
well as any state taxes applicable. You'll be in the top tax bracket,
so you'll have to make sure you put aside another 10% for federal taxes.
You should also make charitable contributions this year: Should
Congress fail to act by the end of the year, your ability to deduct
charitable contributions could be reduced up to 80%, she says.
Why
would you take the annuity payments? Worries that you might not be
disciplined enough to handle the lump sum. "You don't get windfalls like
this in millions of lifetimes, much less twice in one lifetime," says
Gary Schatsky, a New York financial planner. "You have to make sure that
any moves you make are done after careful consideration."
Taxes
are just one thing to think about when you've been handed so much money.
"Plan very carefully what your next steps are," Schatsky says. "Protect
yourself from those who have their hands out, or those who are selling
products."
USA Today