How a Lottery Jackpot Actually Works

The winner won't see the full amount — at least not all at once. Here's how to play, and what it means if you win.
Jul 28, 2022
Mega Millions jackpot

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When a national lottery jackpot balloons to hundreds of millions of dollars — or even more than a billion — a fever seems to sweep across the country. A lottery jackpot of that size is not an easy number to wrap your head around, and a billion-dollar jackpot has happened only three times in Mega Millions history and just once with Powerball. If you want a chance to win the ultimate jackpot, here’s what you need to know.

How to play Mega Millions

In July 2022, the Mega Millions jackpot totaling $1.337 billion was won by a ticket holder in Illinois.

Mega Millions can be played in 45 U.S. states, as well as Washington, D.C., and the U.S. Virgin Islands. Players can buy as many $2 tickets as they want. Drawings take place twice a week, on Tuesdays and Fridays.

Each ticket requires you to pick five numbers between 1 and 70, and a sixth number between 1 and 25 (or, you can let the lottery folks generate the numbers for you). The jackpot goes to the person (or people) who pick all six numbers correctly.

Your odds of doing that are roughly 1 in 303 million.

How to play Powerball

Powerball started in 1992 — four years ahead of Mega Millions. You can play Powerball in 45 states, plus Washington, D.C., Puerto Rico and the U.S. Virgin Islands. Drawings are broadcast live every Monday, Wednesday and Saturday at 10:59 p.m. Eastern time.

Tickets cost $2. To play, pick five numbers between 1 and 69 and a Powerball number from 1 to 26 (or have them randomly generated). The odds of picking all six numbers correctly are about 1 in 292 million.

While Mega Millions has had multiple billion-dollar jackpots, Powerball has had the biggest. Its lone 10-figure jackpot was $1.586 billion in January 2016. It was shared between winners in California, Florida and Tennessee.

Lottery lump sum vs. annuity

Every Mega Millions or Powerball jackpot winner has the option to take cash now in a one-time lump sum or opt for 30 annual payments.

Each option has its pros and cons, said Lisa Kirchenbauer, founder and president of Omega Wealth Management in Arlington, Virginia. Kirchenbauer is a certified financial planner.

She says anyone who finds themselves suddenly wealthy should put together a team of professionals, including an attorney, accountant and financial planner.

“Your team will help you decide which option is best for you,” she said. “It's not a one-size-fits-all decision.”

Mega Millions annuity

To get the full dollar value of the jackpot advertised by Mega Millions (or Powerball), you’d have to choose the annuity option. That’s because the jackpots in both lotteries are calculated based on how much money you’d get if the sum of the current prize pool were invested in an annuity for three decades.

With this option, you would receive a first payment when you win, followed by annual payments that increase by 5% each year. If you’d won the July 2022 jackpot and taken the Mega Millions annuity option, you would get roughly $20 million for the first payment.

If you were to die before all the annual payments were made, the rest would become part of your estate.

Mega Millions cash option

The lottery cash option is based on what Mega Millions — or Powerball — has in its prize pool on the day of the draw. So, you wouldn’t actually walk away with a billion dollars if you took the cash. Still, this option is the most common, according to a list of past Powerball winners.

For the most recent $1.337 billion jackpot, the Mega Millions cash option was $780.5 million.

How much are lottery winnings taxed?

If you win a billion dollars in the lottery, you definitely owe federal income tax on it. To start, 24% of your winnings are withheld for the IRS. How much that is depends on whether you went for the cash or annuity option, since you only pay taxes on what you receive in a given year.

If you’d won the July 2022 Mega Millions jackpot and took the cash option, you’d see $187.3 million taken off the top, leaving you with $593.2 million.

Come April, you’d likely owe additional federal income taxes, as well as state income taxes, depending on where you live.

What to do if you win the lottery

While it’s something we’ve all probably dreamed about, no one is prepared to win the jackpot. If you do, protect your ticket. Whoever possesses a winning lottery ticket gets to claim the award.

Next, consider your anonymity. Each state has its own laws about whether lottery winners have to be publicly identified. Keeping your name out of the news and telling as few people as possible protects you from scammers and long-lost “friends” who want to get back in touch.

The key is to slow down, Kirchenbauer said. “Don’t start spending the money before you have time to plan and think.”

How to claim lottery winnings

Each participating state has its own rules about how to claim a Mega Millions or Powerball reward. In fact, the length of time you have to file your claim ranges from 90 days to a year from the date the numbers were drawn. Make sure you review the rules in the state where you purchased the ticket.