What Are the Different Lottery Payouts and Which Is Smartest To Take?

Mega Milliona, Ashland, United States - 29 Jul 2022
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In the realm of “good problems to have,” it’s hard to top having to decide how you want your lottery winnings to be paid out. Visions of that possibility are dancing in the heads of millions of Americans ahead of the next Mega Millions jackpot drawing, scheduled for Friday night, June 29, at 11 p.m. ET.

Learn: What To Do (and Not Do) If You Win the Lottery
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The jackpot is now $1.28 billion — the second-highest ever, and only the third time a jackpot has moved above $1 billion. If somebody is lucky enough to win the jackpot by matching 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 $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 your comfort with investing. Here’s a look at some of the things to consider when deciding which option is smartest, based on insights from Annuity.org and The Annuity Expert websites.

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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 obligation with the first, immediate payout. After that, taxes won’t come into play until you receive the annual payout in all subsequent years.

Annuity Advantages

  • 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 $380 million 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 $380 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.
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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.

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 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.

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About the Author

Vance Cariaga is a London-based writer, editor and journalist who previously held staff positions at Investor’s Business Daily, The Charlotte Business Journal and The Charlotte Observer. His work also appeared in Charlotte Magazine, Street & Smith’s Sports Business Journal and Business North Carolina magazine. He holds a B.A. in English from Appalachian State University and studied journalism at the University of South Carolina. His reporting earned 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 native of North Carolina who also writes fiction, Vance’s short story, “Saint Christopher,” placed second in the 2019 Writer’s Digest Short Short Story Competition. Two of his short stories appear in With One Eye on the Cows, an anthology published by Ad Hoc Fiction in 2019. His debut novel, Voodoo Hideaway, was published in 2021 by Atmosphere Press.

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