So you’re the lucky winner with a golden lottery ticket. One big question remains before the prize money can hit the bank—should you accept the cash value of your winnings or go with the annuity option? This guide will help you decide, but first let’s take a look at what each payout means.
A lump sum lottery payout is a one-time cash payment whereas an annuity payout provides annual payments over time.
Depending on which state you win in and what lottery game you play, the payout options will vary. Powerball offers winners a lump-sum payout or an annuity option where the payout would be distributed over the course of 29 years and 30 payments. The Mega Millions also offers lump sum payouts and annuities, however the distribution of the annuity is slightly different. With a Mega Million annuity, you are offered the initial payment upon winning and then the remaining balance will be paid out over 29 years, with each payment increasing five percent yearly.
Which is better? There is no right or wrong answer here, but really a matter of preference and spending habits. We’ve outlined the pros and cons to both options below to help lucky winners make a more informed decision:
Choosing the Annuity Option
Consistent income: Taking home the annuity option guarantees that you will have a consistent stream of income for the next 30 years, meaning that it is easier to manage your winnings and not blow them all at once.
The guilt free option: Winning the lottery typically comes with some associated expectations from friends and family in terms of being given a portion of the pot. With the annuity payment option, the pressure to offer hand-outs is not as likely given that the initial and subsequent payouts will be of a smaller quantity than the full jackpot.
Guaranteed self-control: Not everyone possesses the same amount of self-control when it comes to spending habits and it's not rare for lottery winners to run through their winnings within a few years. Annuity payments offer winners the assurance that they won’t spend all of their lottery winnings at once.
Fluctuating taxes: While tax rates may be low when you accept the annuity, there's no crystal ball that can predict the future of the economy. Tax rates could increase exponentially over the course of your payout meaning your ultimate payout would be much lower than if you accepted the lump-sum.
Unforeseen circumstances: 30 years is a significant amount of time and there are unexpected issues that could arise over the course of your payout period. The entity issuing the yearly payments could run out of money or you could pass away before you receive the full funds.
Choosing the Lump Sum
Lump Sum Pros:
Opportunity for growth: Inline with the advice of many financial advisors, a major advantage of taking the lump-sum is being able to reinvest the money and, therefore, growing it into a larger sum.
Potentially lower tax rate: Depending on the current tax-rate, accepting the lump-sum payment could make more financial sense. If tax rates are low, it may be the smarter option to take the lump-sum rather than risking potentially rising tax rates over the course of an annuity payout.
Benefits for inheritance recipients: Accepting the lump-sum also has tax implications for winner’s estate planning. If a winner is on the older-side, a lump sum payout offers an advantage to whoever may be inheriting their wealth, should the winner pass. According to Jason Kurland, a Uniondale, N.Y.-based attorney who has counseled large-jackpot winners, “If a winner dies while receiving the annuity payments, their estate could be hit with a huge tax that it can’t afford,” he said. “The tax will be similar for a lump-sum winner, but at least the money will be there to pay it. An estate may not have the luxury of waiting for the annuity payments in order to pay the tax. There have been instances where this actually bankrupt an estate for a winner who chose the annuity payments.”
Lump Sum Cons:
Maintaining self-control: As we mentioned before, it's not uncommon for self control to fade away when a huuuuuge lump sum hits your bank account.The potential for spending all of the winnings within the first few years following the payout is one of the main cons associated with the lump-sum payout.
Close-circle payouts: Is there such a thing as winner's guilt? It's common (and admirable!) to want to share your windfall with friends and family, but it's also true that hitting it big can create pressure to share the wealth with family, close friends, and not-so-close friends. By accepting the lump sum, you have a larger pot to share than by accepting the annuity option, which can cause a winner’s close circle to have certain expectations around receiving a piece of the pie—not to mention strong opinions about what you should do with the money.
Whether you choose lump sum or annuity—congratulations! You're living the dream. 😎