How Lotteries Work and How Much You Keep If You Win

As eye-popping as a nine-figure lottery prize might be, the winner doesn’t get to keep all of it once lottery formulas and tax collectors have their say. If you’re taking a chance on winning the ultimate jackpot, here’s what to know.

How you win the lottery

Winning the lottery starts with buying a ticket. Each player picks a set of six numbers that they hope will be randomly selected during the next drawing. The jackpot is split between anyone whose ticket matches all six numbers.

If no one picks the right set of numbers, no one wins, and the jackpot continues to grow until the next drawing. That means if you want a chance to win the bigger prize, you have to buy a new ticket.

The biggest prizes are awarded in Mega Millions and Powerball.

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How to play Mega Millions

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).

Your odds of picking the winning numbers are roughly 1 in 303 million.

How to play Powerball

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.

Lottery payout options: Annuity or cash?

Jackpot winners can choose one of two ways to get their winnings: They can get the full prize spread out in payments over 29 years (called the annuity option) or take a smaller one-time lump sum. That’s known as the cash option.

The lottery annuity option

When a lottery like Powerball advertises a big jackpot, like the $1.326-billion prize won in April 2024, it doesn’t have that sum sitting in a vault, ready to be handed to the next winner. Instead, lottery jackpots 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. That means you would eventually get the full sum, but it would take 30 years.

With the annuity option, you would receive a first payment when you win, followed by 29 annual payments that increase each year by 5%. If you were to die before all the annual payments were made, the rest would become part of your estate.

Powerball doesn’t specify the size of its first annuity payment. But if you won a Mega Millions jackpot and selected the annuity option, your first payment would be roughly 1.5% of the jackpot, according to the Mega Millions website. For a jackpot of $1.326 billion, that comes to nearly $19.9 million. The payout would get 5% bigger each year after that.

The cash option

The cash option is based on what the lottery has in its prize pool on the day of the draw. For the $1.326 billion Powerball jackpot, the cash option was $621 million, which is a little less than half the jackpot.

But if you chose the cash option and invested the winnings, you could end up earning more than you would with the annuity option. For example, the average stock market return is roughly 10% per year before inflation.

The cash option is the most common choice among lottery winners, according to a list of past Powerball winners.

Paying taxes on lottery winnings

If you win nearly 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 won the Powerball jackpot and took the cash option of $621 million, you’d see a little more than $149 million withheld for federal income taxes, leaving you with nearly $472 million. Come tax time, you’d likely owe additional federal income taxes.

State taxes are another matter. If you buy a lottery ticket and win in your home state, you’ll owe state income taxes, if your state collects them. How much you’d owe would be determined when you file your state income tax return. Your state will take into account what you already paid. You can estimate the numbers on your big win with our lottery tax calculator.

If you buy a ticket and win while traveling out of state, you could be taxed in both places (again, assuming both states have an income tax). That’s because the state where you purchased the ticket likely will withhold taxes when you win.

How much you’d pay in state taxes, especially if you bought the ticket in another state, can be complicated. If you find yourself in this scenario, talk with a tax accountant to sort it out.

Where lottery prizes come from

Lottery prizes are funded through ticket sales. And that’s one reason jackpots have grown so large. Lottery players are spending more and more on tickets each year, hoping to win it all.

In 2023, players spent more than $113.3 billion on lottery tickets in the U.S., according to the North American Association of State and Provincial Lotteries. That’s up from $73.8 billion in 2015.

Where lottery revenue goes

The lotteries association estimates that 65% of revenue from ticket sales goes into the prize pool, and 24% is used for state initiatives.

Each state decides how to distribute its lottery revenue to selected initiatives. For example, Florida uses a portion of lottery sales to fund public education, according to the Florida Lottery website.

As for the rest of the total revenue, the lotteries association estimates 5% is used to cover lottery operating costs, and another 6% is paid to retailers as commission.

How to claim lottery winnings

Each participating state has its own rules about how to claim a Powerball or Mega Millions 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.

What to do if you win the lottery

If you win the lottery, your first priority is to protect your ticket. Whoever possesses a winning lottery ticket gets to claim the award. If you’re part of a lottery pool, you should have a written record of who’s part of the group, so it’s clear who gets a piece of the prize.

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, said Lisa Kirchenbauer, founder and president of Omega Wealth Management in Arlington, Virginia. Kirchenbauer is a certified financial planner. “Don’t start spending the money before you have time to plan and think.”

She says anyone who finds themselves suddenly wealthy should put together a team of professionals, including an attorney, accountant and financial planner. Among other decisions, these professionals can help you weigh the lottery payout options. Both the annuity option and the cash option have their pros and cons, she says.

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

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10 largest lottery jackpots

Changes to lottery formulas, as well as higher interest rates and ticket sales, have made big lottery jackpots more common. Since 2021, lottery fans have played for eight billion-dollar jackpots. Two came back-to-back this spring, when Mega Millions reached $1.128 billion in March, followed closely by Powerball at $1.326 billion in April.

Here’s a list of the 10 largest lottery jackpots from Powerball and Mega Millions: