Putting $1.5 billion in Powerball for high yield savings can fetch millions of dollars, but is it the right move?

Saturday’s Powerball draw came in and there were no jackpot winners, meaning the winnings have now grown to $1.9 billion. The jackpot is currently the biggest jackpot ever.

The last time 45-state lottery wins were so high was in 2016 when bets hit a world record $1.586 billion, the final amount being split among three people.

Americans love to spend money on gambling. Based on latest data from the Bureau of Labor Statistics, people between the ages of 65 and 74 spend the most on lottery tickets and betting groups. In the final quarter of 2017, individuals in this age group spent about $132 on tickets, while those between 45 and 54 spent about $77.

What would you gain if you put your winnings in a high yielding savings account

Just to be clear, if there is a person who won $1.9 billion in the results of tonight’s drawing, it does not mean that the lucky individual will pocket all of that money. The cash value for the one-time payout option for the jackpot is $929 million.

If a winner chooses to receive that one-time payment, they will likely have to pay the IRS’s top federal tax rate of 37%, or about $343,730,000 in taxes, leaving the winner approximately $585,270,000—before pay any state and local taxes.

By putting that amount in Top choice for a high yield savings account, which offers 4% APY, interest will accrue on $585 million which will amount to approximately $23.4 million annually.

It’s a financial move that lottery expert Victor Matheson, Ph.D., a professor of economics and accounting at the College of the Holy Cross, strongly advises against. “That would be the worst possible thing you could do,” Matheson said.

There are a number of reasons why Matheson feels this way, most of which have to do with how little money you make compared to other options and the tax benefits you would give up to do this, he explained. like more details.

Is it a good idea to put your winnings in a high yield savings account?

In short, no, you shouldn’t deposit lottery winnings into a high-interest savings account.

Lucky winners of the jackpot have a choice when it comes to distributing their winnings. Matheson explains that this amount can be paid in lump sum as described — or through 30-year annual annuity payments. In the case of the current Powerball jackpot, the annual payout for $1.9 billion would amount to about $63 million per year for 30 years.

If you choose to pay annually, the lottery will take most of the money you just won and invest it in a very conservative annuity that will earn you about 4.5%. That’s higher than what the best high-yield savings accounts are offering right now. And your $63 million annual payment will come from that fund.

“So by taking an annuity, it’s basically like you lottery putting your money into a high yielding savings account from the start,” explains Matheson.

But here’s the initiator — and why it went so far less than Get a one-time payment and put it in a high-yield savings account: By choosing annual payments, you avoid paying a 37% federal tax bill on $929 million. Instead, you pay taxes once a year on smaller annuity payments.

“You can defer taxes on an annuity basis, because you don’t have to pay all your taxes upfront like you would if you took it in a lump sum and put it into a high-yield savings account yourself,” says Matheson. . “If you take the lump sum now, you’ll be taxed first.”

That’s a $343.7 million federal tax bill versus paying about $23.3 million annually in taxes for $63 million in annual distributions. “From a purely financial standpoint, the advantage of getting an annuity is that you don’t have to pay taxes on your winnings until you actually receive the money,” continued Matheson. “You’re getting a bunch of hard earned money for you and tax deferred. It’s not like it’s tax-free, but you pay no tax on that final annuity payment for 30 years.”

Separately, if you choose to put that $63 million annual payment into a high-yield savings account, you’ll earn about $1.6 million per year, (after paying 37% in taxes, making you have about $40 million to save). But this does not mean that annuity payments are the only option.

Savings accounts are more profitable than investing in the stock market

Although a high-yield savings account may not be the smartest financial move you can make With millions of dollars in lottery winnings, there are other choices. However, another scenario for your win is to invest your money in the stock market.

If you choose to take a one-off distribution, pay your tax bill on the winnings, and invest the money yourself, you can invest it much more aggressively than in the lottery.

“I don’t mean putting money in junk bonds, or Tesla, or technology, or forex [foreign exchange], Matheson said. “I mean put it in index funds across the board, like any S&P 500 index fund. In that case, you’re taxed up front, but over the long term index funds average between 7% and 8%, so you’re likely to get ahead over time. But you have to invest heavily.”

Doing the math on that investment method, Matheson calculates that you could earn somewhere in the neighborhood of $46.8 million annually, assuming 8% return on an investment of $585 million. dollars.

What to do if you win the lottery

Of course, deciding what to do if you win the lottery is a very personal choice. And obviously, the odds of winning are tiny – around 1 in 292 million, in fact.

Matheson says of those who beat the odds and win, about 99% choose a one-time payment. So, what to do if you find yourself in those lucky shoes and suddenly face such dilemma? Do you take all the money at once? Receive annuity payments? Invest it vigorously? Here are some do’s and don’ts to consider:

  • Don’t make a one-time payment and put it in a high-yield savings account: If you choose to pay a lump sum, Mathserson recommends against sending it in for the high yield savings. “If all you’re going to do is put it in a safe, conservative federal and state bond or a high-yield savings, under no circumstances should you pay it off, because the union The lottery will do it for you and you. Matheson recommends deferring all of that tax.
  • Assemble a group of advisors. For most of us, a lottery win brings in more money than we’ve ever had to deal with. Assemble a team of trusted, vetted, and top-notch advisors who can help. This should include an attorney and a financial professional. “Seek professional and legal advice immediately upon winning this or any other lottery prize,” says Matheson.
  • Implement a plan. Think carefully about your monetization goals and make a plan that includes both short-term and long-term priorities. Your plan may also include charitable donations and other priorities like traveling or paying for your child’s education.
  • Set a budget. Even as a millionaire, it’s important to manage money wisely. Get your team of experts to help develop a budget that includes daily expenses as well as annual expenses like property taxes, and don’t forget your tax bills. If you choose to pay by annuity, you will need to pay an annual tax bill on that income.
  • Invest wisely. Whether you pay a lump sum or annually, you should invest some of that money in a diversified portfolio of equity and debt mutual funds, with a focus on index funds, Matheson said. Matheson said. “Stay away from personal business deals for things like franchising or small businesses or venture capital until you know what you’re doing,” he says.
  • Establish a legacy plan. Finally, remember to think twice about how to handle your winnings during your pass. “There is a clear will and clarity with proper estate planning,” says Matheson.

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