Lottery Payouts: Lump Sum vs. Annuity Payments
Winning the lottery is great, but do you know how you will be paid? This is important, especially if you plan to sell your lottery payments. If you win the lottery, you have various options on how you can collect your prize—either as an annuity or lump sum.
Choosing the annuity option means you will receive annual payments over time, while a lump-sum payout will distribute the full amount of after-tax winnings at once. Depending on the type of lottery, a single lump sum may be provided or 30 annuity payments over 29 years.
Your Payout Options
One of the most important decisions you'll ever make when you win the lottery is how you plan to collect your winnings. As mentioned, you can get the payout in a lump sum or on an annuity basis.
Keep in mind, each state and lottery company has its own set of rules. Therefore, the payout options will vary. For example, Powerball provides winners a choice of getting a lump-sum payout or an annuity of 30 payments over 29 years.
On the other hand, Mega Millions offers lump-sum payouts or annuities. Should you choose an annuity, you will be provided with an initial payment followed by 20 annual payments. Every payment is 5% bigger than the previous one.
Which Payout Option Is Better
Both lottery payout options ensure a payout; each has its own advantages.
Getting the lump-sum payout can help prevent long-term tax implications and provide you with the chance to invest immediately. On the other hand, a long-term annuity payout allows for major tax benefits. Moreover, annuity protects winners who have the tendency to spend everything following a lump-sum payout.
Undeniably, many lottery winners often invest all their money at once, and most of the time, it’s not done properly. This is why there have been many lottery winners who got into bankruptcy or financial troubles.
Compared to lump-sum winners, those who choose to take annuity payouts can earn advertised jackpots. Still, most big-prize winners choose lump sum.
The thing is, annuities are inflexible, which means you won’t be able to change the payout terms when you agree on this kind of payout method. It may also prevent you from making huge investments.
Taxes should also be considered when making a decision on which form of payout you should choose. Lump-sum payment will be subjected to current federal and state taxes during the time the money is won.
On the other hand, there’s more uncertainty when it comes to an annuity. As each annuity payment is received, it will be taxed based on the then-current federal and state rates.
Selling Your Lottery Annuity
Some people who choose the annuity option for their lottery payouts often explore their options to sell. If you plan to do this, you need to speak with the lottery company first to know how you can sell your annuity payments.
Currently, 28 states allow after-market sales of lottery annuities for a lump-sum payment. You can also choose to sell all or part of your future payments. A judge will also need to decide whether the sale is in the person’s best interest.
As mentioned, both have their advantages. Winning the lottery is a good thing, but the payout method can make winners hit a brick wall. That’s why you need to think things through. As long as you stick with your chosen payout and manage the sum properly, you’ll be able to enjoy your prize.