What Are the Different Lottery Payouts and Which Is Smartest To Take?
Long considered a harbinger of bad luck, millions of American lottery players are hoping that the Friday the 13th Mega Millions grand prize draw on Jan. 13 will bring misfortunate numbers for everyone (except themselves_. With a grand prize of over $1 billion up for grabs, one or more participants will be in the potentially enviable position of having to decide how they want their lottery winnings to be paid out. The draw is scheduled at 11 p.m. ET Friday night.
After 25 straight draws with no winner, the jackpot has grown to $1.35 billion — the second-largest Mega Millions prize ever and fourth-largest in U.S. lottery history — per NBC 4 New York/WNBC. With odds of winning at one in 302.6 million, if somebody is lucky enough to match all six numbers they can choose to have their winnings distributed in one of two different ways: as an annuity of 30 payments over 29 years, or as an immediate cash lump sum.
Most winners opt for the cash option even though doing so means you get a reduced sum. For the current jackpot, the cash option is $707.9 million.
Deciding which option is best depends on a few different factors, ranging from your age and financial situation to your comfort with investing. Here’s a look at some things to consider when deciding which option is best, based on insights from Annuity.org and The Annuity Expert websites.
How Are They Taxed?
- Cash option: Federal income taxes are due as soon as you receive the cash payout. You might also move into a higher income tax bracket for the year, which could triple your tax rate. Depending on where you live, you might also have to pay state and local income taxes on your payout.
- Annuity option: Income taxes are deferred until payouts are received. You’ll have some tax obligations with the first, immediate payout. After that, taxes won’t come into play until you receive the annual payout in all subsequent years.
- The biggest advantage to an annuity is that you know you will have a steady, long-term source of income. This is the smarter option for people with a history of money problems — especially for smaller payouts. Although it seems unlikely that anyone netting hundreds of millions of dollars in a single payout could go broke in a hurry, it’s not unheard of. Taking the annuity option greatly reduces the risk of going broke. Even if you die, you can pass the annuity on to your heirs.
- With an annuity you can spread your taxes out 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 $707.9 million after the IRS gets its cut.
- Because of the tax impact, winners who take annuity payouts usually come closer to earning the advertised jackpots than those who choose the cash option.
Cash Payout Advantages
- The main advantage here is that you get a massive pile of cash all at one time, immediately, to do with what you want. The certainty of having liquidity on hand is probably why most winners choose the lump-sum payout. This is an especially attractive option if you are experiencing financial problems due to high debt, high medical costs or something else. A cash payout can let you go from a position of financial weakness to one of strength.
- Even though annuity payouts tend to give you more of the jackpot than cash payouts, you could still earn more money long-term with a cash payout if you invest the money wisely. This is a smarter option for younger winners than older because they have more time to ride market ups and downs.
- Although it’s not the most likely scenario, you could end up doing better tax-wise with a cash payout because of the possibility that long-term taxes will go up.
The Bottom Line
From a purely monetary standpoint, it is usually smarter to take the annuity option for the simple reason that you will get a bigger portion of the jackpot. But it’s not a one-size-fits-all decision. If you need immediate financial relief, it might be smarter to take the cash option. Likewise, if you are an experienced investor, you might be better off taking the cash payout and putting the money to work immediately.
David Nadelle contributed to the reporting for this article.
More From GOBankingRates