Taking the lump sum option means a federal tax of 24%, or nearly $187.8 million, for someone whose federal filing status is “single.” Then, at tax time, another 13% or nearly $101.7 million, would need to be paid, according to the USA Mega website.
That would bring total winnings to $492,949,045. With additional state taxes to pay, as well, Ohioans would see that amount decrease further.
Ohio’s 3.99% state tax would remove another $2.13 million away from the 30-year payout or another $29.7 million from the lump sum, giving the winner a total of $945,271,350 over 29 years ($31,509,045 per year) or a lump-sum total of $461,731,285.
“Take the lump sum” said Bill Dendy, an estate attorney, CPA and certified financial planner at Alicorn Investment Management, who has represented three lottery winners. “At (a nearly $500 million lump sum), even if we spent over a 30-year period, you’re probably going to keep on hitting that highest tax bracket and tax brackets are probably going up.
“Taking the lump sum now protects you from any increases in the future tax rates and most people think tax rates are liable to move up.”
In addition, Dendy said the amount of the payout over time versus the lump sum option is inversely related to interest rates.
“Interest rates are higher now and so the lump sum is going to be a little lower than it might have been a year ago, but taking lump sum allows you then to have more flexibility with the timing of how you spend the payments,” he said. “You’ve got the flexibility to take out larger amounts in the early years and small amounts in later years or invest the money for potentially higher returns.”
The downside of taking the lump sum, even if one argues that the taxes will be less over time, is having to then manage that enormous amount of money, Dendy said.
“Having a lot of money allows you to accentuate who you already are,” he said. “So if you’re kind of reasonable and good in the way you manage your life and your assets, a bunch of money can be a blessing to you and your family and to your charities you care about and to your community. But if you’re already kind of messy, a lot of money will let you get that extra special messy you see on the reality TV shows, and those are the ones that people keep talking about.”
Dendy said lottery winners should hire an attorney who can arrange for the Powerball prize to be claimed anonymously to avoid “the negative repercussions of recognition.”
“Anonymity is very valuable right now,” he said. “When one person wins a lottery, people that you haven’t heard from since your second-grade homeroom classroom will call you up and ask for some help. You suddenly become a target for every type of scheme that you can imagine, and not always just people asking or trying to get you to invest in businesses, but also for criminal activity.”
Dendy also suggests that lottery winners hire an independent financial planner, “one that has an understanding of a vast variety of investments who is not simply directing you to their own firm’s mutual funds or insurance products.”.
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