It’s a special feat to win the lottery, but now is the time for some serious decisions. The first important question is which lottery payout option you’ll choose. Major lottery games like Powerball offer lump sum and annuity payouts. Some players want their entire winnings at once. Others like to spread it into annuities.
In this guide, we will consider both payout options including their pros and cons to help you find the best choice for you.
One of the first decisions that winners have to make after winning the jackpot is if they want a lump sum or an annuity payment over several years. It’s easy to explain the lump sum – you pick to receive the entire prize at once. However, you will only get around 60% of the winnings due to the lottery tax at the federal and state levels.
Annuity, on the other hand, typically offers more because the lottery tax calculations will be done at a per annum level. Regardless, the best optician for you depends on your goals and what you plan to do with the money. Before choosing the winner of the lottery lump sum vs annuity battle, let’s explain what annuity means in full.
How Does the Lottery Annuity Work?
A lottery annuity payout option indicates you pick to receive the prize in several installments. Those installments usually stretch over several decades. In big US lotteries like MegaMillions, the rule is to spread the prize across 30 annuities. The trick is there’s a yearly increment rate to accommodate inflation. That’s why you’ll receive the least in the first annuity and the most in the last annuity payout.
Mega Million Payout Options: Lump Sum VS Annuity
Did you know that the biggest jackpot a single winner received was in MegaMillions? The guaranteed prize fund is $40 million, and the reward can only increase.
Now, let’s say you won $100 million. If you choose annuity payouts, the first thing to consider is paying the taxes. They depend on the state and country but are usually around 30%. So, you’ll have around $70 million to receive across 30 years. Now, if we assume that the yearly increment is 5%, you receive $1 million the first year. Your last installment will be $4.33 million.
But if you choose the lump sum, you get around $43 million right away. Here is how – the lottery rules imply that your prize will be lowered if you pick the lump payout. You’ll receive around 61% of the prize, which leaves you with $61 million. Upon paying the taxes, you’ll go home with $43 million. If you need help, you can check the MegaMillions payout and tax calculator we designed.
Powerball Payout Options: Lump Sum VS Annuity
The story in US Powerball is similar to MegaMillions. You have both options to choose from, and it only depends on how you prefer the prize. The lump sum will reduce the total prize value, but you’ll get all your money now.
As for annuities, they spread the reward to 30 yearly installments, which increase with every next installment. If you count all the payouts together, you receive the advertised jackpot sum (minus taxes). But who knows what could happen in the next three decades? The decision is up to you, but you can check out our Powerball payout and tax calculator to see both options.
Popular Lotteries and their Annuity Period
The annuity essentially lets you collect your winnings over a period of years. However, the annuity period varies depending on the game. The table below shows a list of lotteries and their annuity period.
*Euromillions and Italy SuperEnalotto do not offer annuity payment, so the lottery organizers pay every prize as a lump sum.
Differences between Lump Sum and Annuity
The table below highlights the different features of lump sum vs annuity
Lump Sum
Annuity Payment
Payment Structure
Winners get their entire prize amount in a single payment
Winners receive their prize money spread in installments over several years
Tax
Winners pay a higher tax liability since the jackpot is received in a single tax year
Annuity payment comes with lower taxes because the tax will be charged based on the amount you receive in that tax year
Financial Planning and Management
Management of the winnings fall to the winner
Financial planning and management falls to the lottery organizers
Liquidity
The winnings is immediately available to the winner after taxes
Once chosen, winners cannot access the entire winnings
Who Should Choose it?
People who have the financial knowledge to efficiently manage their winnings
People who want a steady source of income that will continue to grow over time
Can I Sell My Lottery Annuity?
Did you know that you have the option to sell your annuities for cash? That’s not available everywhere as only 28 states allow this possibility. If you are interested in this option, make sure to mention that in your agreement with the lottery company. You need to inform and get approval from the lotto office first before you can sell the annuities.
It’s up to you to pick whether to sell all or only some annuities. The actual terms are up to you, so it’s important you find the offer suitable. However, make sure the court approves the transaction. It’s for the judge to decide whether the transfer will go through, and their primary focus is on determining whether the offer is realistic.
Selling Lottery Payouts
If the budget is tight, you might consider selling lottery winnings. Here is how the process works:
Contact the lotto office and make sure you can sell your lottery annuities.
Find a trustworthy investor willing to buy the annuity for cash from you.
Finalize the terms of the deal.
Get the document approved in front of the judge.
Enjoy spending your money!
What Happens to My Lottery Annuity When I Die?
Ifit happens that you pass away, your heirs have the right to receive the remaining lotto annuities. You can specify to whom you want to receive the annuity payouts in your will. Depending on the lottery, the company might pay a cash sum of the remaining prize. Thanks to that, it will be easier to distribute the inheritance. However, some lotteries continue to pay in installments.
Bottom Line: Which Is Better – Lump Sum or Annuity Lottery
There’s no clear winner in the lottery cash option VS annuity battle. The lump-sum grants you a huge amount of money immediately, but it is still less than what you receive if you calculate all annuities. Installments are a steady source of income, but nobody can guarantee what could happen in the next 30 years. That’s why you should consider your preference and pick the option that suits you best!
Advantages of an Annuity
Receiving all money immediately. Your prize might be lower, but it will still be a huge cash injection. This is a unique feeling that you need to experience as it’s hard to compare with much else.
A chance to invest and grow the wealth. If you have a lot of money in your account, you can consider investing. If your business is successful, you can only increase your wealth.
Live a better life. For starters, you’ll pay off your debts. You’ll also be able to afford new houses and cars, as well as travel. You need to be cautious, but big money should give you a better life, at least for a while.
Advantages of Lump Sum
A steady income in the decades to come. Most annuities are spread over 30 installments. You might feel like you won the lottery every year since it’ll essentially be a feeling you got free cash.
The total prize is bigger. Due to the rules, annuity payouts allow you to receive the advertised jackpot sum (minus taxes).
No risk you’ll waste the entire sum. Even if you don’t spend the first installment wisely, you have a new chance next year.
FAQs
What Are the Lottery Payout Options? Depending on the lottery, you might have lump payouts and annuity as potential payout options. Lump-sum indicates you get the entire reward at once. Annuities spread the entire sum over 30 or so years.
What Is the Best Option for Lottery Winnings? If you think you can manage big wealth at once, lump sums give the true feeling of winning the jackpot. But if you prefer a steady income in decades to come, it’s better to go with annuity payouts.
How Many Years Is Lottery Annuity? It depends on the lottery, but the usual time for annuities is 30 years.
How to Calculate Lottery Annuity Payout? The annuity depends on the prize sum, yearly increment, and the number of payouts. The bigger the increment, the more your prize will increase with each next year. Most lotteries will give you a potential schedule of payouts if you show interest in annuity payouts.
Is Lottery Annuity Considered Income? Yes, the lottery annuity you received in that tax period must be reported as income. Check out our tax guide for more details on applicable taxes.
Can You Leave Lottery Annuity to Someone? That’s only an option if you die, which is when your heirs or a person you chose to receive annuity payouts. If you are alive, you can’t transfer your lottery annuity to anyone else. You need to get the sum to your account, and then you can do whatever you want with it.
Why Is the Cash Option Less than the Jackpot? If you decide on the annuity option, the lotto company keeps the funds for investing purposes. They can earn interest, and they don’t have that possibility if you take the cash. That’s why they lower your immediate cash payout.
