How Lottery Winnings Work: Hitting the Jackpot Explained

Posted by Matin Varshochi in Personal FinanceAugust 4, 20224 min read
Key Takeaways
  • A lottery ticket sold in Illinois won a $1.3 billion jackpot on July 30, 2022, making it the second highest recorded Mega Millions jackpot.
  • The person with the winning ticket can now choose to either get their earnings through an annuity or lump sum.
  • Although winning life-changing money is great, other factors should be considered before buying lottery tickets.
Are you ready to make some real money moves?

On July 30, 2022, a $1.34 billion jackpot was won in a Mega Millions lottery. As this amount was the second highest recorded in United States history, it is the perfect time to go over the process of winning the lottery, from the luck it requires to how the winnings can be claimed and the disadvantages of winning a lump sum of money with practically no effort.


Chances of Winning the Lottery


Although winning the lottery is a dream for many as they get access to life-changing money, the chances of winning the lottery are very slim. The chances of winning the lottery are around 1 in 292 million.

 

To give you another scenario to help put your chances of winning the lottery into perspective, the chances of becoming the President of the United States is around 1 in 32 million. So this means there is a higher chance of you becoming the President of the United States than winning the lottery.

 

mega millions

Image Credit: Dominique James / Shutterstock.com

 

Additionally, you have a better chance of getting struck by lightning, which is one in a million, than receiving access to a lottery jackpot. The purpose of showing the statistics behind these unlikely events is to show that the possibility of winning the lottery is much lower than one would think. 


As many people hope to win a large sum of money, it leads to high sales of lottery tickets which continues to jack up the prize money of winning the lottery. In reality, purchasing lottery tickets can be a waste of money as the possibility of buying a winning ticket is slim to none. 


How Lottery Winnings are Paid Out


Suppose you do stumble across a winning ticket; you are now left with two options on how to receive your winnings: annuity or lump sum.

 

Annuity Payments


Annuity means you will not receive access to your winnings at once, but over a consistent period of time, typically around 30 years. According to Mega Millions, once a person wins their jackpot, they will receive one immediate payment followed by 29 annual payments, increasing by 5% each year. 


This option allows the jackpot winner to receive access to consistent income for the majority of their life and prevents them from losing all their winnings. 

 

Lump Sum Payment


The lump sum payment means the winnings will be given out all at once but at a discounted price. Since inflation results in the dollar value being worth less in the future than today, the lottery company considers this when calculating the payout. Therefore, you will not receive the advertised amount if you select the lump sum amount. Instead, you will receive how much the winning amount will be worth today.

 

How Lottery Winnings are Taxed


A hefty tax bill will be assessed regardless of which lottery-winning payout option you choose. Both options put your income into the highest tax bracket, meaning a large sum of federal and state taxes must be paid. The top federal tax rate is 37%, meaning any income exceeding $523,601 for a single filer will be taxed at this income tax rate.


Recommended Read: How Tax Brackets Work and How They Affect Retained Income

 

mega millions jackpot

Image Credit: MargJohnsonVA / Shutterstock.com

 

Each state must tax lottery winnings, meaning you will also pay taxes to the state you live in on your tax return. Depending on the state you reside in, your tax rate will vary.

 

The Disadvantage of Lottery Winnings


The major disadvantage of lottery winnings is that most winners usually go broke. Unfortunately, around 70% of all lottery winners lose all their winnings, regardless of how much money they have won. As many lottery winners go broke, this shows that if you lack financial discipline with the money you currently have, then you will not be able to handle a larger amount. 

 

mega millions ticket

Image Credit: OneLineStock.com / Shutterstock.com

 

Therefore, if you do win the lottery, a smart financial decision would be to hire a personal financial advisor and attorney who specializes in lottery winnings. These two professionals can help you ensure your winnings are utilized in an effective way. 

 

Recommended Read: 2 Questions to Ask Before Selecting Your Financial Advisor


Receiving help from professionals to look after your finances can help you stay on top of your money and lowers your chances of misusing your funds. 

 

The Money Wrap-Up


Winning the lottery usually means the winner will receive access to money that can change the trajectory of their lives. However, despite the monetary benefits that arise from winning the lottery, the major downside of possibly losing all the earnings is not worth it, not to mention the amount of money that has to be spent on tickets until a winning ticket is found. 


Therefore, instead of spending money on lottery tickets and hoping to win the jackpot, start putting a portion of your income aside to invest, as the funds will then continue to grow by compound interest and you can build wealth over time. 

 

Main Image Credit: GaudiLab / Shutterstock.com

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