Lottery Lump Sum Payout
Everyone wants to win the lottery, but those who do are faced with a tough choice. Do they take the money as an annuity, or in one lottery lump sum payment?
Now, most people would usually take it all in one go, preferring the option of the lottery lump sum payment, but an annuity, which pays the money out in increments over time, may be the wiser option. Why?
Because of Taxes.
Just because you won $400 million doesn’t mean you’ll get $400 million, especially if you choose to take it all in a lottery lump sum payment. Winning a huge amount of money is going to elevate the winner into a new tax bracket, sometimes regardless of whether they choose to receive it as a lottery lump sum payment, or as an annuity, even if said annuity is stretched out over the long span of 30 years or so.
Say for example you won $400 million in 2013. The maximum federal income tax rate that year was 39.6%, which means that if you take the money in a lottery lump sum payment, you’d be looking at paying a 39.6% rate. Since tax rates are perpetually changing year to year, taking the money as an annuity would mean having a different rate each year a payment was received.
Therefore, those who think the maximum tax rates will decrease over time would be wise to take an annuity instead of a lottery lump sum payment.
Of course, that’s just the federal tax. There’s still state tax to consider, too. The obvious strategy to pay a smaller amount would be to book it to Florida, which has no income tax, but wouldn’t work for a couple reasons.
First of all, it’s impossible to change your state of residency the day you win the lottery. Secondly, even if you took the annuity instead of the lottery lump sum payment, and could make it Florida as soon as possible, there are many states that have a rule saying if you earn income, but have yet to receive it, you will still have to pay taxes to the respective state it was earned in.
Expected tax rates, future residencies, and current residence are the three things that should be kept in mind when figuring out whether or not to get an annuity or a lottery lump sum payment. That being said, which is the smarter choice given the example? An annuity or a lottery lump sum payment?
Provided that the top tax rate doesn’t actually change over the course of the 30-year annuity (for simplicity’s sake), taking an annuity would result in about $242.9 million after taxes. Taking the lottery lump sum payment would leave you with about $135.1 million left after taxes.
So that’s how much would be left after taxes, but what about the future? Is an annuity or a lottery lump sum payment the smarter choice in terms of investments?
You’d ultimately have more money left over after taxes from an annuity, but with a lottery lump sum payment, you could earn more interest much faster over the 30 years the annuity would take to pay out.
At a five percent before-tax return and based on 40% tax rate, the lottery lump sum payment would grow to about $325,641,533, while the annuity would grow to $359,719,738, making the annuity the better choice. What’s interesting, though, is that if it’s raised to a 7% before tax return, the lottery lump sum payment becomes the better option, as it would then make about $31 million more.
Basically, whether you choose an annuity or a lottery lump sum payment all depends on how markets are doing. While these factors may make things rather complicated, they have to be considered to ensure that you get the maximum amount for your winnings.
If you need help deciding whether or not to receive your winning in a lottery lump sum payment, or as an annuity, do not hesitate to get in touch with us today.