How Much of the Lottery Jackpot Ends Up in Your Pocket

The jackpot in Friday night’s Mega Millions drawing was an amount most of us can barely imagine. But if you were to win the lottery, how much of that prize money actually ends up in your pocket depends on how you claim it. Whether you choose an annuity with 30 graduated payments or a lump sum, the decision is significant.

A responsible winner will dump any cash windfall into safe investments like real estate, stocks and mutual funds. That will preserve and potentially grow the wealth while avoiding taxes.

But if you take the lump sum, that money will be subject to federal income tax at the top rate of 37%. That means you will end up with only about half of the advertised jackpot.

In the case of the New York Lottery, which offers an annuity option, winners can opt to receive annual payments instead of the lump sum. To make that happen, the lottery asks bond brokers to quote a package of bonds that will pay future yearly payments. Then, the Lottery buys those bonds at the best price available. When one of those bonds matures, the Lottery transfers those funds into a prize-payment account. Over time, the bonds will cost the Lottery about five-percent interest.

That’s how the Lottery organizers can offer those big prizes. And it’s how they can create a prize pool that grows larger every time nobody wins the jackpot. It’s a strategy that has made the Lottery much harder to win over the years, says Victor Matheson, an economics professor at the College of the Holy Cross.