How this calculator works
Mega Millions advertises the jackpot as the total of a 30-payment annuity. Each annual payment is 5% larger than the one before, so the first payment is about 1.5% of the headline figure and the last is about 4.1 times the first. A winner can usually choose a cash option instead, which is the amount the lottery would need today to buy the investments that fund the annuity. That cash value moves with interest rates and is typically between about 40% and 60% of the advertised jackpot, so the field is set to 50% as a planning default. Federal income tax is withheld at 24% immediately, but the final rate for a large win is normally the top marginal rate, which is why this calculator uses a single federal rate you can set. State tax is zero in some states and up to about 10% in others. The model does not include local tax, the effect of progressive brackets on the lump sum, or the difference between withholding and the final bill.
Formula
Cash option = jackpot x cash share. Tax on the lump sum = cash option x (federal rate + state rate). Net lump sum = cash option x (1 - federal - state). Annuity: first payment = J(1.05 - 1)/(1.05^30 - 1), and payment k = first x 1.05^(k-1). Net annuity total = jackpot x (1 - federal - state).
Worked example
A $100,000,000 jackpot with a 50% cash option has a lump sum of $50,000,000 before tax. At 37% federal and 5% state, the tax is $21,000,000 and the net lump sum is $29,000,000. The annuity starts at $1,505,143.51 and ends at $6,195,374.77, with $58,000,000 after tax over 30 years.
Advertisement
Frequently asked questions
Why is the cash option about half the jackpot?
The advertised jackpot is the total of 30 growing payments. The cash option is the present value of those payments, calculated with current interest rates, so it is much smaller. When interest rates rise, the cash value falls relative to the advertised figure.
How much tax will I actually pay?
A large win is taxed at the top federal rate, not at the 24% withheld. State tax varies from zero to about 10%, and some cities add their own tax. Add all of them, and consider that the annuity spreads income over 30 years, which can keep some payments below the top bracket.
Is the annuity safer than the lump sum?
The annuity offers a known schedule funded by government securities, which is very safe as long as the lottery pays. The lump sum gives you control and the chance to earn a higher return, but it also exposes you to investment risk and to spending the money too quickly.
Can I change my choice later?
Usually not. The choice between cash and annuity is normally made within a short period after claiming, and some states require it at the time of purchase. Decide before you claim.