When you win the lottery, you can receive your money in one of two ways: an annuity settlement, or a lottery lump sum payout.
With a lottery annuity, you receive the money in lottery payments. Take for example the Mega Millions annuity schedule and the Powerball annuity schedule. Mega Millions is paid out as one immediate payment, followed by 29 annual payments that increase 5% each year. Powerball has 30 annual payments that also increase over time.
The lump sum payout, on the other hand, is exactly what it sounds like. It’s a lump sum. To most, this might seem like the better choice. Why wait to get your money, after all? However, taxes must be considered. Off the top, the lottery withholds about 25% for federal tax, and then another 6% or 9% depending on where you live and what your tax bracket is.
When you do the math, more taxes get taken out of lump sum payments than annuities. Consequently, annuities are often seen as the smarter option.
This, however, is not always the case. In most scenarios, a lump sum payment can often be a smarter choice than an annuity. Here’s why.
You Can Deposit It, So It Accrues Interest More Quickly. — Even though you get a bigger chunk of your money taken away for taxes, you can recoup it by depositing your money. With enough time, the interest will replace the money taxes took. Although the same could be said about an annuity, you earn more interest faster with lump sums.
You Can Invest It. — Although it’s not quite as safe as depositing your money, you can invest your lump sum, and possibly make even more money off of your winnings.
You Can Start a Business With It. — You could also use your lump sum to start a business. Although it may take a couple years to break even, starting a business is a great way to make money with your lottery winnings.
Of course, it’s ultimately what you plan to do with your money that decides which is the better option, but no matter how you look at it, you’re still getting a boat load of money.
If you have any questions about a lump sum payout or an annuity, feel free to share in the comments.