Planning Is Key: How to Decide Between an Annuity and a Lump Sum Payout
Planning Is Key: How to Decide Between an Annuity and a Lump Sum Payout After you win the lotto, you have the choice of accepting your winnings as either a lottery annuity settlement, or as a lottery lump sum payout. One option is not necessarily better than the other, but depending on what you plan to do with the winnings, an annuity may be better than the lump sum payout, or vice versa. Here’s how.
The Annuity Option
If you don’t have any particular plans for your winnings, it may be smarter to choose the annuity option. An annuity pays out the winnings as yearly lottery payments, rather than as one, large sum. With the Mega Millions annuity schedule, the money is paid out as one immediate payment, followed by 29 annual payments, with each one being 5% bigger than the last. The Powerball works similarly, with a schedule of 30 annual payments that increase overtime. In an immediate annuity, you can generally start receiving payments in just 30 days.
The reason an annuity may be a smarter option if you don’t have any plans is because of the taxes that get taken out of the winning. You see, when you win the lottery, it withholds 25% for federal tax, then, depending on what state you live in, and your tax bracket, it’ll take another 6-9% for state taxes. Because they’re percentages, more will be taken out if the amount of winnings is higher. In other words, you don’t lose as much of your winnings to taxes, because an annuity’s payments are smaller than a lump sum’s.
The Lump Sum Option
Now, this doesn’t mean make the lump sum option worse. Just because more gets taken out for taxes doesn’t mean you can’t recoup that loss. If you put the winnings immediately into a savings account, it’ll gain interest, and over a period of years, the money that was lost to taxes will return. Since interest is a percentage, a lump sum will be able to quickly accrue more than an annuity would.
A lump sum may also be a smarter option if you plan to use the money to invest in a business. Not only will a successful business allow you to regain your investment, it will continue to make you money for years. That being said, starting a business can be risky, so it is a bit of a gamble.
If you have any questions, feel free to share in the comments.