While perusing the state's many fine newspapers and on-line journals, I noticed some comments from a person in the St. Louis area who was upset about the way we advertise our jackpot amounts. Specifically, they were upset with the amount a recent Lotto winner from Troy ended up with after taking the lump-sum. I thought this would be a good time to explain how that works.
When you play a game like Lotto or Powerball, the advertised jackpot is based on the percentage of sales designated for prizes which is invested and paid out over a period of time. For Lotto, the amount is usually about half of estimated jackpot, which is then invested in Treasury bonds and paid out over 25 years. The lump-sum is that original percentage of sales that would have been invested, usually about half of the advertised jackpot. Winners will pay taxes on the amount they receive in any given year either way. The Lottery withholds 29 percent for federal and state taxes, but the actual amount owed depends on the winner's income and can often be much higher.
That's why the lump-sum prizes seem much smaller. The amount is just the portion of sales which would have been invested, and it's usually quoted after withholding taxes. The annuity amount is what will be paid over 25 years for Lotto prizes, before taxes. A lot of people prefer the lump-sum, presumably because they believe they can get a better rate of return on their own. On the flip side, the annuity payments are guaranteed and the tax burden spread out over the 25 year period. However you choose to take it, it's always nice to win.