How Is the Lottery Funded and Where Does It Come From?

Lottery jackpots can get as high as billions of dollars. Read on with Yotta to learn where all that money comes from and where it goes.

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Adam Moelis
Sep 14, 2022
10 min read

The Mega Millions and the Powerball have top prizes that have reached over a billion dollars. While that number is hard to conceptualize, it’s almost harder to conceptualize where all of that money comes from in the first place.

So, where do the lottery funds come from, and who funds them? Is it possible for the lottery system to ever run out of money? Let’s answer all your burning questions so you can start playing.

Where Does the Lottery Money Come From?

The Mega Millions jackpot lottery is an example of a multi-state lottery with a progressive jackpot that gets higher and higher every time there is no winner announced. This jackpot has gone as high as $1.537 billion. But where in the world did all that money come from?

The simple answer is that this money comes from ticket sales. The more people who play the lottery, the more lottery revenue will be in the jackpot for lottery winners. But the prize money in the lottery isn’t entirely based on ticket sales. We’ll talk more about that in a second.

But first, who are the lottery players begin with?

Who Plays the Lottery?

Anyone above 18 can play lottery games, including jackpot games and scratch-off tickets. While individual states have their own laws, the universal age in the United States is 18 to be able to play.

Additionally, individuals between 50 and 59 play the lottery more than any other age group, averaging about 26 days throughout the year being invested in the lottery.

You can get a lottery ticket at any lottery retailer across the country. Most grocery stores, gas stations, and convenience stores sell tickets until a certain time of night. This also includes scratch-off tickets, allowing you to win money instantly rather than waiting for weekly drawings.

What If No One Wins the Lottery?

It doesn’t happen often, but if a large lottery distributes a winning ticket and the prize goes unclaimed, the money goes to the jackpot of the next game. This is called a rollover, and it’s essentially how the multi-state games like Powerball and Mega Millions can accrue dollar amounts that are so high.

The US Powerball does not have a rollover limit, so the prize amount could rise to infinite amounts. This is what makes it such a draw for many lottery-goers. It makes more sense to try your luck at the lottery when the prize is higher because the odds don’t change, but the return on your investment has the potential to be much higher.

Of course, the higher the prize, the more likely it is for more people to play. And if someone else wins the jackpot during the same drawing as you, then the jackpot will be split. With that said, the chances of this happening are probably Infinitesimal.

How Is the Lottery Money Distributed?

If you win a Mega Millions jackpot, you’ll be entitled to an extremely high amount of money. However, only 50 percent of ticket revenue gets paid out in the prize pool. The other 50 percent goes to the participating states.

For instance, if the lottery makes one billion dollars off ticket sales for the Mega Millions, the total prize pool will be 500 million. The participating states would then evenly split the remainder of the money.

Lottery retailers also collect a small commission for the tickets they sell. They vary but are typically between five and eight percent of the total winnings. The amount also depends on the type of product sold.

Individual states have the final say regarding how they want to distribute the money. We’ll learn a little bit more about that later.

Is Playing the Lottery Considered Gambling or Investing?

There have long been debates about whether playing the lottery is considered gambling. Gambling, by definition, is the process of playing a game for money. The lottery is completely random, so it would be considered gambling by these metrics.

However, you can argue that since the lottery’s prize funds are set in advance, the lottery operator does not participate. When gambling, players compete individually against a gambling operator, like a dealer. It is in the gambling operator’s interest to win against the players.

Regardless of how you view it, it’s hard to argue that playing the lottery is an investment because you’re never guaranteed a return. Regardless, it can be a fun and exciting way to press your luck if you have some spare cash.

Who Owns the Lottery System?

The lottery system is a multi-state game run and regulated through the Multi-State Lottery Association (MUSL). This is an American, non-profit, government-benefit association owned and operated across the 34 participating states.

Participating states offer one or more of the MUSL’s lottery games, like Powerball, but the states themselves still can independently regulate lottery sales, prize payments, and other responsibilities.

What Do States Do With the Lottery Money?

There’s a lot of money floating around through the lottery system, so you’re probably wondering where the lottery money goes in the states. After all, they’re keeping about 50 percent of the total number of ticket sales every time a payout is announced.

Individual states can decide what to do with the lottery money they receive. Most use the income to address gambling addiction, while others put it into a general budget. Some states have even used the money to support the educational system and education funding.

Some state governments use the funds for public education through the building and supporting of public school systems. Similarly, some states use the excess funds for administrative costs or good causes like general state funding for building infrastructure.

Illinois uses some revenue to fund the Special Olympics, while California solely uses the winnings to fund education. Massachusetts uses the revenue to fund its Arts Council, while North Dakota uses some money to provide resources to the Drug Task Force.

So regardless of if you win the big jackpot, you can find solace that your ticket is still contributing state by state. It’s a win-win for everyone!

What Are Some Benefits of the Lottery System?

There are plenty of different benefits to the American Lottery system that can make you feel better about spending a few bucks on a ticket.

It Can Decrease Taxes

One of the downfalls of winning the lottery is that you don’t necessarily get to pocket the entire prize pool. In most states, a percentage of the winnings are withheld by the state in the form of taxation. This applies to winnings over $1,200. The exceptions here are Delaware and California, which do not tax winnings.

While this might be a bummer if you win, this is generally a major benefit of the lottery system. The lottery stemmed from lawmakers seeking to appease anti-tax movements by trying to find alternatives to raising taxes. And lottery games match the criteria.

So when you think your yearly taxes are high, just remember that they could be much higher if the lottery system weren’t in place. Plus, the lottery is entirely voluntary as opposed to mandatory taxes, so this is a much better way to give back to the government.

It Can Fund Infrastructure

States use 50 percent of the ticket sales to fund infrastructure and other beneficial endeavors in the state. This includes education, public works, and even gambling addiction helplines. 

It Can Change Your Life

Playing the lottery can also just bring you a lot of joy. The excitement and camaraderie of buying a ticket and possibly becoming a multi-millionaire are exhilarating, to say the least.

And if you are lucky enough to win the grand prize jackpot, you’ll be subject to a life-changing amount of money. You may never need to work a job again, worry about mortgage payments, or be unable to financially support your family and friends.

What Are the Cons of the Lottery System?

The biggest issue with the lottery system is how it can impose financial burdens on individuals, especially those struggling with gambling addiction. 

The Diagnostic and Statistical Manual of Mental Disorders (DSM) classifies gambling addiction as an addictive disorder. It is a need to gamble to achieve desired excitement, experiencing restlessness or irritation when attempting to cut back on gambling, and a preoccupation with gambling.

This disproportionately affects low-income individuals, as studies have found that those with fewer means tend to play more. Those with lower income tend to gamble more heavily because they can get more value out of the dream and promise of pursuing high amounts of wealth by simply buying a ticket.

What You Should Do If You Win the Lottery

If you won the lottery, congratulations! You truly have defied all odds. You're 300 times more likely to get struck by lightning than you get the winning numbers, so this win is something to celebrate. However, there are a few things you need to do right away.

First thing’s first, take a deep breath and try to collect your thoughts. This is super exciting, but you need to think clearly to make the right moves going forward. After that, don’t rush to collect your lottery winnings. Depending on your state, you have anywhere from 90 days to an entire year to claim your winnings.

There’s going to be a media frenzy surrounding your winnings. You want to secure your ticket as if it were a newborn child. Make copies of the ticket, and be sure to sign the back of it so no one else can submit it and pretend to be you. Keep it in a safe or security deposit box until you’re ready to cash it in.

Next, you’ll want to hire some legal experts. You’ll easily be able to afford them with your newfound winnings, so hiring professional help can allow you to plan what to do with your earnings and jump through hoops in the near future.

Each state varies when it comes to claiming your money, but you’ll likely need to take your ticket in person to the lottery headquarters in your state. Some states have multiple, while others just have one.

And finally, request anonymity if possible. Some states allow you to withhold your name and face from the public record, and if you have this option, we recommend you take it. This can protect your privacy immensely.

Lump Sum vs. Annuity Payments?

When you win a giant lottery prize, you can choose to take your winnings as a lump sum or annuity payment. Lump sum payments mean you take the entire winnings in one giant transaction. If you choose annuity payments, your winnings will be paid out bi-weekly, monthly, or annually.

The choice here is yours to make. A lump sum means you’re guaranteed all of your winnings to enjoy, but you might fritter away all of your winnings at once. Annuity payments guarantee some nice income over time, but you might die before you can enjoy all of it.

Either way, you’ll be making a life-changing amount of money that you’ll want to be careful about. Be careful of who you tell, and be sure to have a financial plan so that you manage your money properly.

What Taxes You’ll Have To Pay

The IRS considers lottery winnings as gambling winnings, which can therefore be taxed just like ordinary income. This means you’ll need to pay federal taxes on your winnings. The amount you pay is dependent on how much you win.

It’s a little tricky because winning loads of money can push you into a higher tax bracket and force you to need to pay more. Additionally, the state where you win the money can affect how much you take away.

Most lottery agencies tax around 24 percent of your winnings. This is a bummer, but just remember that your taxes are also going towards funding the betterment of your state and country.

Yotta: Another Way to Play the Lottery

Playing the lottery is fun and exciting, but there’s no guarantee that you’ll get your money back. What if there was a way to save money while still pressing your luck?

Yotta offers an account that pays out interest in prizes of up to $1 million every day – just by saving! We make saving, spending, and managing money easy and fun. Get started today!

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