Future Lottery Winners Should You Take the Lump Sum or Annuity?

Different ways to invest your money

Do you ever dream about winning the lottery? Who am I kidding, we all do. After a hard day of work, or when you finally make it to payday, only to realize that your entire check is already dedicated to bills, it is cathartic to dream about winning the lottery and never having to worry about money again.

While planning out what you would do the jackpot winnings, one decision you have to make immediately after winning the lottery whether to take a lottery annuity plan, or a lump sum. Whether you have actually won the lottery, or are just facing financial challenges and dreaming about it, here are some things you probably did not know about your lottery payout:

  • Your jackpot is only worth the advertised value with an annuity.
    That’s right, the dollar amount that is associated with your lottery winnings is actually only accurate with a lottery annuity. If you take a lump sum, the lottery office gives you the dollar amount that they would have invested on your behalf in order to give you lottery annuity payments for the total payout over the course of 20 or 30 years.

    In other words, if the total value of your lottery jackpot was $1 million, your lump sum payout might be closer to $600,000 (before taxes are even take it out). The idea is that you would be able to invest this same amount of money over the same time, and collect the total value of the jackpot. This argument is obviously flawed, since the lottery office has the ability to invest the lump sum untaxed, whereas you have to take 40% off the top of your winnings to pay Uncle Sam.
  • The tax implications of taking an annuity vs. a lump sum.
    While we’re on the subject of paying Uncle Sam, taking a lottery annuity always results in far less taxes paid over the long run. When you file your taxes, the tax bracket that you are designated into is based on your earnings for the entire year. If you accept the huge lump sum, the IRS says, “Wow you’re rolling in cash!” and puts you in the highest tax bracket, taking the largest chunk of your money that they legally can get away with. Meanwhile, if you take lottery payments over 20 or 30 years, your annual income is far lower than per year and therefore, your tax burden results in a lower percentage of your lottery winnings going to the government.

  • Who really wins with an annuity plan?

    While the whole payout set up sounds like a giant scam, the lottery annuity system is actually designed to protect you. You’ve probably read the horror stories about people who won the lottery and then lost everything. Statistics suggest that 75% of lottery winners go broke within five years. When you are unprepared to manage such a huge amount of money, it can be more difficult than you would expect. As they say, “More money, more problems.” Friends and family come out of the woodwork to ask for hands outs. You might feel like you can never run out of money, so you live lavishly and make excessive purchases. Then suddenly your ATM card is declined, and you realize every penny you won is gone. This is why the annuity system was developed. Taking a lottery annuity helps you avoid these common pitfalls, to manage your finances and improve your quality of life over the long haul.

  • You can change your mind later on.

    One thing that some lottery winners did not realize, is they do not have to make the decision permanently. Let’s say taking annuity payments is more beneficial to you now. However, down the road you change your mind and need a large settlement to start a business, buy a home, or make another worthwhile investment. There are actually numerous companies whose sole function is to purchase annuity plans from lottery winners. You can sell part or all of your lottery winnings to a company like this and be on your way. You can have your cake and eat it too.

Do you have any questions about taking a lottery annuity? Shout them out in the comments!