How to Take Payments If You Win the Lottery: Annual vs Lump Sum

Lottery Jackpot Text With Lottery Balls Background

Lottery games are immensely popular. Hopeful gamblers are flooding retailers to get their shot at jackpots that climb into the hundreds of millions.

If you find yourself holding a winning ticket, you’re going to face some hard decisions. One of the most vital decisions you’ll make is how to receive your money—annually or in a lump sum.

Let’s look at how to maximize your lottery jackpot.

Lottery Dreams Do Come True

We all know how astronomical the odds of hitting the lottery are. The likelihood of hitting the Mega Millions jackpot is 1 in 302,575,350, and Powerball is 1 in 292,201,338.

In other words, you’re 500 times more likely to be dealt a royal flush on two consecutive hands. The chances are incredibly slim.

Still, people do win the lottery. It’s not an everyday occurrence, but several times a year, a lucky gambler holds a ticket that changes their lives forever.

Powerball Plus Lottery Ticket

It doesn’t matter what your opinion of the lottery is one way or the other. The overwhelming reality is that you’ll never win if you don’t buy a ticket.

I hear far too many people talk about how the lottery is a waste of money. I’m curious as to why they’re so concerned with how other people spend their money. I could say the same about their $8 cups of coffee.

However, I don’t do that because it’s none of my business. That’s their prerogative, which is the same as someone buying a $2 lottery ticket with little chance of winning. The fact remains that someone always wins eventually, and nobody is calling them stupid as they enjoy their millions.

Making Tough Gambling Decisions

Those rare few that are fortunate enough to pick the winning numbers will face several difficult decisions. Choosing the winning numbers was actually the easy part.

The first decision you’ll make is who to tell. Many people’s immediate reaction is to spread the good news to everyone they know.

Most attorneys and lottery officials would advise against this. In fact, they’d tell you not to contact anybody about the life-changing event.

The first contact should be to an attorney. Find the most reputable estate planning lawyer you can; remember, money is of no object.

This critical step will not only serve to protect your money but will also protect your privacy. Not every state will allow lottery winners to remain anonymous.

Having a team of lawyers in your corner can ensure that you take the proper steps in protecting your newly acquired wealth and your identity. Otherwise, you’ll have long lost family, immediate family, and anybody else looking for a handout beating at your door.

Once you have a legal team in place, it’s time to plan a getaway. You’ll probably want to get out of town for a few days to clear your head and imagine what the rest of your life is going to be like.

Possibly the most crucial choice you’ll face is whether to take the money via annuity payments or a smaller lump sum cash payment. Each of these options has several unique advantages and disadvantages. We’ll breakdown each choice shortly.

Before we get to that, you need to understand the tax ramifications.

Lottery Jackpot Tax Ramifications

The worst part of winning over $100 million is paying the government their share. Lottery winnings are considered taxable income and are subject to federal and state income tax. Assuming you live in a state without its income tax, you’re looking at nearly 40%.

That’s a sizable chunk of money heading straight out the door. The current estimated jackpot for Mega Millions is $713,000,000.

Mega Millions Lottery Tickets

That means a lucky winner would need to fork over almost $29,000,000 to the federal government. That’s assuming you take the cash option.

If you take the annuity, you could pay more or less depending on the tax laws each year. Lower taxes would obviously mean a smaller dent, but it’s terrible news if the taxes go up.

Again, this is where having a tax professional or an attorney can be of great benefit. Regardless of which direction you choose to go, there will be an extensive check to write when claiming gambling winnings on your taxes.

Annual Lottery Payments

The annuity option is the “safe” play. According to Mega Millions, the winner receives an initial installment payment immediately and 29 annual payments to follow.

Some lottery winners are enticed by the notion of having a steady stream of income. You theoretically could go dead broke but by January, you’ll be a millionaire again.

This is a viable plan if you battle impulse control. However, you’ll be selling yourself short in many ways.

The way annual lottery payments are structured stacks over 50% of your money in the last 10 years of the annuity. There’s also no guarantee that whatever entity is paying your annuity won’t go bankrupt before the 30th year. Unfortunately, you could die before the annuity’s term and never see all of your money.

As the saying goes, “the only things that are certain in life are death and taxes.” If the tax rate suddenly jumps from 40% to 80%, you’re going to regret taking that annuity sincerely.

Still, if the idea of having a check coming every year appeals to you, the annuity option is available.

Lump Sum Lottery Payments

The lotteries also give you the choice of a lump sum payment. This cash upfront is typically noticeably less than the sum of the annuity payments.

However, there are several benefits. I’ve covered the uncertainty of the tax ramifications with the annuity. This is null if you select the cash option, you pay a one-time income tax on your winnings and move on.

Unfortunately, those winners that become too generous may see their vast wealth dwindle to nothing. There will be a ton of people that come looking for a handout.

These include charities, friends, and, worst of all, family. I’m not saying you shouldn’t be charitable with your new wealth.

Ripped Up Lottery Ticket

You should be discretionary if you aren’t able to tell people, “No.” I suggest hiring someone to deny them for you; you mustn’t blow through your fortune.

It seems that you’ll receive much more money by taking the annuities. That’s not necessarily the case.

If you are wise with your cash option, you may see much greater wealth long-term. By investing a large portion of your winnings responsibly, you may easily double your annuity total.

That’s based on the most modest returns. It’s possible that you could grow your wealth even larger.

Long-Term Lottery Options

Long-term, you’ll have many more opportunities to grow your money by taking the lump sum.

We live in an uncertain world, and anything can happen. This is especially true if you’ve just won the lottery.

Things like taxes could see your winnings sliced dramatically. Maybe Mega Millions can’t sell tickets and is forced into bankruptcy. Obviously, the latter is unlikely. Then again, so was your sudden windfall of millions.

If you’re looking to set yourself and your family up for long-term financial security, the cash option is the better choice. Sure, the money may entice you to drop millions on frivolous luxury items. Still, you’ll be able to afford most of them. Growing your money over time is a much better path to success than merely waiting for a check to come once a year.

Conversely, I’ve seen ordinary people that won big burn through millions in only a couple of years and end up living with their parents. There is definite security to having several million rolling your way every year.

Overall, if I ever buy a winning lottery ticket, I’ll be taking the cash option, and that’s the last you’ll hear of me.

Leaving a Legacy

Contrary to what you many of you may have heard, if a lottery annuity owner dies, the annuity continues to pay. Unfortunately, the money may be taxed again for estate purposes.

There are a number of safeguards that may be put in place to provide for your heirs long into the future. Possibly the most fundamental aspect of setting up generations is growing your wealth is by investing.

Closeup of Hands on a Laptop Keyboard

You won’t need a master’s degree to see why investing the lump sum will grow exponentially faster than investing a smaller sum each year for the next 29 years.

In fact, you are almost guaranteed to see much more money by making low volatility investments. This type of prudent financial planning can ensure that your grandchildren’s grandchildren will never need to worry about college tuition.

Maximize Your Lottery Winnings

If you’re thinking of playing the lottery, in the end, who really cares whether you take a lump sum or cash option?

You’re rich enough not to care what people think. Not that many of you do anyway, which is why I like you.

Annuity or lump sum is a personal choice. How to maximize your lottery jackpot should be placed in the hands of trustworthy professionals.