Dear Powerball Winner: Take Our Advice and Take the Annuity
If you invested all your prize money in the same way Powerball does (essentially by putting it in government bonds), you’d end
up with 20 percent more cash in 2045 if you took the annuity option rather than the cash option, thanks to the tax savings.
But if you take the lump-sum cash prize, you’ll pay tax twice: on the prize when you win it, and on the income you get by investing it.
You could shave that difference by picking a different investment strategy with better tax management,
but you’ll never beat the effective tax rate of zero on the investment income earned inside the Powerball annuity.
The main one is that taking the annuity is basically like letting the government hold onto part of your prize for a while
and invest it for you — and the government does not pay tax on investment income.
