Mega Millions: How a billion-dollar jackpot actually works

July 28, 2022 1:30 PM

Taryn Phaneuf, NerdWallet

Posted: July 28, 2022 1:30 PM

Updated: July 31, 2022 2:44 AM

The Mega Millions jackpot has ballooned to an estimated $1.02 billion ahead of the next drawing on Friday, July 29. A billion dollars is not an easy number to wrap your head around, and it’s happened only twice before in Mega Millions history.

If you want a chance to win the jackpot, here’s what you need to know.

How to buy a Mega Millions lottery ticket

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. 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.

Though it’s a national game, each participating state has its own rules about how to claim a reward. In fact, the length of time you have to file your claim can range 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.

How much could you win?

Every Mega Millions jackpot winner has the option to take cash now in a one-time, lump-sum payment or to receive a chunk of the winnings annually for 30 years.

For the $1.02 billion jackpot, the cash option is $602.5 million.

If you took the annuity option instead, you could get roughly $15.3 million for the first payment. Then each one after that increases by 5%. If you die before all of the annual payments are made, the rest will be sent to your heirs.

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

Kirchenbauer also said that 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.”

How lottery winnings are taxed

If you win a billion dollars in the lottery, you definitely owe federal income tax on it. To start, according to the IRS website, 24% of your winnings are withheld. 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 take the cash all at once — remember, that’s about $602.5 million — you’d see $144.6 million taken off the top, leaving you with $457.9 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

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 can file a claim for 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.”

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Is $790 million worth $2?

That’s a good question, given it costs $2 to buy a Mega Millions lottery ticket that could pay off with an estimated $790 million prize, the nation's fourth-largest jackpot, after the game’s next drawing Tuesday night.
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Not really.

To start with, your chance of winning the grand prize is minuscule, at one in 302.5 million. You have better odds of a smaller payoff, such as winning $1 million for matching five regular numbers but missing the Mega Ball. But even that is one in 12.6 million. To put that in perspective, your chance of dying in a car crash — something to consider as you drive to the mini-mart for a lottery ticket — is around one in 101 over a lifetime, according to the nonprofit National Safety Council.

As lottery officials note, players should think of their $2 bet as a chance to dream while accepting the reality they likely won’t be entering a new income tax bracket Tuesday night.
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Ah, but even if you somehow beat the odds you are not going to get $790 million.

First, that’s the amount for winners who take the annuity option, paid over 30 annual payments. But winners nearly always opt for cash, which for this drawing would pay out an estimated $464.4 million.

And then there are federal taxes, which will slice off 37% off that cash prize, so that would leave less than $300 million, though state taxes could cut in to that amount as well, depending on where the winner lives. Still a fortune, but a smaller fortune. That also doesn’t account for the possibility someone else will match the winning numbers, meaning they would need to divide even those smaller winnings in half or more, depending on the number of lucky players.
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It is definitely a big paycheck.

To put that in perspective, consider that the median U.S. household income in 2020 was $67,500, meaning a lifetime of work at that rate would be less than 1% of even the smaller jackpot after taxes.

But sadly, if you had won that same prize a year ago, before the nation endured a year with an inflation rate of about 9%, your buying power would have been significantly higher.
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Eventually, though the reason the grand prize has grown so large is because no one has matched all six numbers since April. That's 28 consecutive drawings without someone hitting the jackpot.

With so many people playing now that the potential top prize is so large, it becomes increasingly likely that someone or multiple players will finally end that streak. Still, past prizes have grown larger, as the biggest payday was a $1.586 billion Powerball jackpot won in 2016.

Mega Millions is played in 45 states as well as Washington, D.C., and the U.S. Virgin Islands. The game is overseen by state lottery officials.
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If you have fun dreaming of a massive windfall that most likely won’t actually blow your way, buy a ticket. But if you need to watch your money, consider keeping the $2 in your wallet.
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