What are the different lottery payments and which is the smartest to take?

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In the realm of “good problems to have”, it’s hard to decide how you want your lottery winnings paid out. Visions of that possibility dance through the heads of millions of Americans ahead of the next Mega Millions jackpot draw, scheduled for Friday night, June 29 at 11 p.m. ET.

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The jackpot is now $1.28 billion – the second highest ever, and only the third time a jackpot has exceeded $1 billion. If someone is lucky enough to win the jackpot by matching all six numbers, they can choose to have their winnings distributed in two different ways: as an annuity of 30 payments over 29 years or as an immediate lump sum cash.

Most winners go for the cash option, even if it means you get a reduced sum. For the current jackpot, the cash option is $747.2 million, according to the Mega Millions Website.

Deciding which option is best depends on a few different factors, ranging from your age and financial situation to how comfortable you are with investing. Here’s a look at some of the things to consider when deciding which option is smarter, based on the information provided by Annuity.org and The annuity expert websites.

How are they taxed?

  • Cash payment: Federal income tax is due when you receive the cash payment. You could also move to a higher tax bracket for the year, which could triple your tax rate. Depending on where you live, you may also have to pay state and local taxes on your remittance.
  • Annuity option: Income taxes are deferred until payments are received. You will have some tax liability with the first immediate payment. After that, taxes will not come into play until you receive the annual payment for all subsequent years.

Annuity Benefits

  • The biggest advantage of an annuity is that you know you will have a stable, long-term source of income. It is the smartest option for people with a history of money problems, especially for small payments. While it seems unlikely that anyone raking in $380 million in a single payout could go bankrupt quickly, it’s not unheard of. Taking the annuity option significantly reduces the risk of going bankrupt. Even if you die, you can pass on the annuity to your heirs.
  • With an annuity, you can spread your taxes over a longer period of time rather than taking a big hit by accepting the lump sum payment. As GOBankingRates reported, a winner who takes the cash option on the current Mega Millions jackpot could end up with less than $380 million after the IRS gets its cut.
  • Due to the tax impact, winners who take annuity payments are usually closer to winning the advertised jackpots than those who choose the cash option.

Advantages of cash payment

  • The main advantage here is that you get a huge stack of cash all at once, immediately, to do with whatever you want. The certainty of having cash on hand is probably why most winners choose the lump sum payment. This is an especially great option if you’re having financial trouble due to high debt, high medical bills, or something else. A cash payment can move you from a position of financial weakness to a position of strength.
  • Even though annuity payouts tend to give you more of a jackpot than cash payouts, you can still make more money in the long run with a cash payout if you invest the money wisely. This is a smarter option for younger winners than older ones, as they have more time to weather the ups and downs of the market.
  • Although not the most likely scenario, you might end up doing better tax-wise with a cash payment due to the possibility of higher taxes in the long run.

See: Working with a financial planner helps investors sleep better at night
Experts: what to do with your money if you win the lottery?

The essential

From a purely monetary standpoint, it’s usually better to take the annuity option for the simple reason that you’ll get a bigger portion of the jackpot. But it’s not a one-time decision. If you need immediate financial assistance, it may make more sense to take the cash option. Likewise, if you are an experienced investor, you might be better off taking the cash payment and putting the money to work immediately.

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About the Author

Vance Cariaga is a London-based writer, editor and journalist who previously held positions at Investor’s Business Daily, The Charlotte Business Journal and The Charlotte Observer. His work has also appeared in Charlotte Magazine, Street & Smith’s Sports Business Journal, and Business North Carolina magazine. He holds a BA in English from Appalachian State University and studied journalism at the University of South Carolina. His reporting has won awards from the North Carolina Press Association, the Green Eyeshade Awards and AlterNet. In addition to journalism, he has worked in banking, accounting and restaurant management. A North Carolina native who also writes fiction, Vance’s short story “Saint Christopher” placed second in the 2019 Writer’s Digest short story competition. Two of her short stories appear in With One Eye on the Cows, an anthology published by Ad Hoc Fiction in 2019. Her first novel, Voodoo Hideaway, is published in 2021 by Atmosphere Press.

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