Big Decision: Lump Sum or Annuity?
Monday November 12, 2018 06:07 am
The Lottery Lab Staff
The image you win a big jackpot, a seven or eight figure jackpot. Now it is time to make some important decisions. The very first decision you face is how to receive the prize money. Most states give you the choice of receiving a lump sum in cash or you can receive your funds in the form of an annuity (usually spread out over 20-30 years). Receiving lump cash seems exciting, after all the whole point of playing the lottery is to become an instant millionaire, right? But there are some advantages to choosing the annuity which makes it the smart decision to make. For instance, an annuity provides guaranteed consistent payouts for years and you can transfer any remaining payouts to your loved ones in your will.
The majority of lottery winners opt for lump sum cash because becoming a millionaire is exciting and a fairy-tale come true. The main advantage of the lump sum is that you have access to complete amount right away. Not only do many winners like this option but their accountants, financial advisors, lawyers, consultants, and money managers like this option too. The more, the better. For elderly winners and particularly those without heirs lump cash may be the best option.
Opting for the annuity sets you up to take tax advantages. When you take the lump cash, as much as half of the jackpot prize is paid to income taxes (including federal and state taxes). With annuity option, only the payout you receive is subjected to income tax. The remaining payouts are protected from federal or state taxes until your next payout. Delaying the government from taking taxes against your lottery winnings gives you time to structure your life and finances to make informed long-term decisions. On the day you may not know how to do this, but over time you will learn more.
Additionally, choosing an annuity can actually mean you are saving you from yourself. Sudden wealth of millions of dollars can be a life-changing event and being a millionaire may not be everybody ’s cup of tea. With the inevitable avalanche of friends and family members, even the wisest can lose perspective. Moreover, the chances of going bankrupt after winning a jackpot are slightly higher than for people who never won the lottery. Opting for an annuity keeps the payouts safe and gives you time to grow into the role over the next 20-30 years.
One disadvantage to the annuity is how inheritance is treated if you pass away. Heirs who receive an inheritance above a certain amount have to pay estate taxes which can be extremely high. For this reason, the Powerball lottery allows your heirs to receive unpaid money in a lump amount to help cover taxes without the risk of bankruptcy.
So, when your lucky day arrives, examine the advantages and risks before making the decision. Take the option which best suits your lifestyle and income status better. Good Luck!