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Lottery payout options
The first option is called a lump-sum award. That’s when the winner receives all of the lottery winnings after taxes at one time.
Taxes also influence many lottery winners’ decisions on whether to choose a lump-sum payout or an annuity. The advantage of a lump sum is the certainty that the lottery winnings will be subjected to current federal and state taxes as they exist at the time the money is won.
The second option, a long-term payment agreement, is called an annuity. Annuities give recipients a stream of periodic disbursements from an account created by their state lottery commission.
The advantage of the annuity is the exact opposite, uncertainty. As each annuity payment is received, it will be taxed based on the then-current federal and state rates. Those who choose the annuity option for tax reasons are often betting that tax rates in the future will be lower than the current rates. However, should they regret their decision in choosing an annuity payout, lottery winners do have the option of selling their annuity payments for a discounted lump sum.
Comparing the two
The ups and downs of both annuities and lump sum payments.
While both options guarantee a lottery payout, the lump sum and annuity options offer different advantages. Choosing a lump sum payout can help winners avoid long-term tax implications and also provides the opportunity to immediately invest in high-yield financial options like real estate and stocks.
Consider the case of $228.4 million Powerball jackpot winner Vinh Nguyen, a California nail technician and sole top prize winner of that game’s drawing on Sept. 24, 2014. Most big-prize winners opt for the lump sum. That would have been $134 million. Instead, Nguyen opted for the annuity. That will give him the full $228,467,735 jackpot paid out over 30 years.
Those payments include interest that will accumulate from investments over the life of the annuity. Annuities also protect winners who might otherwise spend everything after a lump sum payment.
Some winners may squander their funds all at once or not invest it properly, leading them to bankruptcy or other financial troubles. An annuity isn’t for everyone. Annuities are inflexible, prohibiting winners from changing the payout terms in the case of an unexpected financial or family emergency. The annual payments may prevent a winner from making large investments. Such investments generate more cash compared to the amount of interest earned on the annuities.
Two facts two consider when making the payout decision
Opting for the annuity payment results in having huge tax benefits, because federal taxes reduce lottery winnings immediately, therefore winners who opt for the annuity payments come closer to earning their jackpot than those who opt for the lump sum payout.
Lump Sum Or Annuity Lottery
At the moment there are twenty-eight states that allow aftermarket sales of lottery annuities for lump sum payment. Theses luck men or women can also choose to sell all or part of their future payouts.
Now we’ve given you the what’s what, so it’s up to you to decide. Lump sum or annuity.