When the Powerball winnings got up to $580 million last week it made many of us including me think about what we would do if we won.
The first thing I wondered was just how much goes to the IRS and State of Colorado. And the answer naturally was depends. If I take the lump sum which is 1/2 of what the advertised winnings is I would “win” $290 million. Of which they would withhold 29% ($84.1 million) to the IRS and 4% ($11.6 million) to Colorado. So my check would be for $194.3 million. I would need to keep in mind that come tax time I actually would need to pay 35% to the IRS and 4.63% to Colorado so I would owe another 6.63% $19.227 million so bottom line is I would have roughly $175,073,000 million I could invest.
The next thing I wondered was just how much would go to the IRS and State of Colorado if I took the annuity payments. If tax rates stayed the same over the next 29 years, (which they won’t I doubt even that they stay the same for 2013) that answer is $229,854,000. Which means I would have $350,146,000 to invest. The difference of $175,073,000 million (yep twice as much) is due to the time value of money. Simply put it means if I invested the entire winnings from the lump sum payment I would receive if I took it all now I would have to earn approximately 5.3% on it over the next 30 years to reap the same benefit.
Now if you were good at investing and could make earn 7% you would be better off to take the lump sum and invest it. But it seems that most lottery winners don’t invest the winnings they take the lump sum and spend it meaning that they would have been better off to take the annuity because in the end they would have had a little more to spend. Granted it is hard to earn 5.3% in this market let alone earn more and even harder to spend $175 million. So for me the decision is driven based on tax rates and since President Obama wants to tax those with income over $250,000 I think I would be safest in taking the lump sum. It is hard enough to hand over $115 million for taxes at 39.63% it might lead to a stroke to have to hand over 50% or more.