Lump Sum or Annuity: Lottery Payout Options 

We’ve all heard the cautionary tale of the lottery winner who blows their lotto payout and ends up bankrupt. And while you might believe that you would be responsible with such a large sum, research suggests that most of us aren’t as careful with large windfalls as we might imagine.

Bankruptcy among jackpot winners is actually quite common.

If you win the lottery, the first thing you should probably do is talk to a financial planner. And they’ll help you consider your lottery payout options.

When it comes down to it, the big payout decision is: Lump sum or annuity? Lottery winners have to choose between taking the lottery prize as a single cash payout or as several annuity payments over a period of time.

This article explains exactly what a lottery annuity is and how it works.

If you just won big and now you have to choose between the cash option and the annuity, this article will help you decide which is right for you. And if you're simply daydreaming about financial security, don’t worry.

We'll also share the secret to getting a lifetime income without having to buy a Powerball lottery ticket or win the Mega Millions jackpot. (Spoiler alert: It’s deferred annuities.)

What Is a Lottery Annuity?

A lottery annuity is a lottery payout option. Instead of receiving your jackpot winnings in a single lump sum, you receive periodic payments over time. It’s called a “lottery annuity,” but it’s really just a fixed immediate annuity.

Instead of holding an annuity with a life insurance company like Canvas, lottery winners have their lottery annuities held by lottery companies.

How Does a Lottery Annuity Work?

Lottery annuity payout options depend on which lottery you win.

Imagine you won the Powerball jackpot and you were going to take home $100 million. The Powerball annuity option would split that prize into 30 lottery payments. You’d get one payment immediately and the rest would come in future payments every year for 29 years. Each payment would be roughly $3.33 million.

With the Mega Millions annuity option, you’d also receive 30 payments over 29 years. But it’s a little unique in that each payment is 5% larger than the last.

So if your payout was $100 million, the first payment would be about $1.5 million. Each payment would steadily increase by 5% until the last payment of about $6.2 million.

Death Benefits on Lottery Payouts

Lottery annuities almost always include death benefits. Suppose you choose the annuity payout option, and you die before you receive your total winnings. In that case, the remaining funds pass on to the heirs in your estate.

Tax Implications of Lottery Payout Options

Lottery winnings are taxable. The IRS considers them gambling winnings, and they’re taxed just like regular income tax.

With the lump-sum payment, you would pay federal tax (as well as local and state taxes if applicable) right away. If your prize is quite big, be mindful that it could push you into a higher tax bracket. And remember that states and cities differ in how they tax lottery winnings, so check your local and state lottery tax rules for details.

In the annuity option, you’re taxed just like a regular annuity. You pay taxes over time as you receive your annual payments.

Depending on the size of your prize, this could help you stay in a lower tax bracket and pay fewer taxes in the long term. But it also creates some uncertainty because tax rates can increase and decrease—it’s hard to know what tax rates will be 30 years in the future.

Estate Taxes

If you die before you receive all your winnings, they go to your estate and are distributed through your will. At that point, estate taxes could apply, depending on the amount of money left in the annuity. Your beneficiaries may even have to pay taxes on money that hasn’t been distributed yet.

Lottery Lump Sum vs. Annuity—Pros and Cons

Each payout option has some advantages and some disadvantages. Here’s a quick summary of each.

Lottery Annuity Pros

• You have a guaranteed income for the next 30 years
• You won’t splurge and go bankrupt in the first few years
• The limits on your cash can help you say no to opportunistic family and friends
• Your lottery jackpot annuity earns interest over time, providing steady growth for your winnings

Lottery Annuity Cons

• The only part of your winnings that you can access is what you receive in your periodic payments (the rest is inaccessible—even if you have an emergency)
• You can’t use your winnings for large, immediate investments like real estate
• Tax rates could increase over the 30 years you receive distributions (although they could decrease, too)

Lump-Sum Payout Pros

• You have immediate access to the total amount (there are no limits to how much of it you spend)
• You can immediately invest as much as you like into high-yield assets, possibly earning you more money over time
• You know what the tax rate is today, so there's no uncertainty about how much you’ll pay in taxes

Lump-Sum Payout Cons

• You could manage your money poorly and blow the entire amount in the first few years (this happens even to people who think they’ll be careful)
• You may learn that you do not have the discipline to invest a large lump sum responsibly
• Taxes could decrease in the future (if you choose a lump sum option, you may pay more in taxes now than you would later)

Which Payout Option Is Right for You?

So which payout option is right for you?

It depends on your circumstances. If you’re confident that you could handle the money well—that you’d hire a financial advisor, make a plan, and responsibly invest your winnings—then a lump sum option may be appropriate for you.

But if you’re like most of us, who aren’t as adept at making good financial decisions after large windfalls of cash, the annuity would be the better option. It would help ensure you can pay your bills for the next 30 years, and it’d prevent you from giving in to all of your spending urges.

The annuity option does what annuities do best: It provides you with a guaranteed income for years to come.

And if you choose the annuity option and then come to regret your decision, you can usually sell it. Some companies buy lottery annuities from winners for a discounted lump sum.

Annuities for the Rest of Us

While it’s nice to dream about how we’d spend massive lottery winnings, the reality is that most of us won’t win the lottery.

But that doesn’t mean we can’t still attain financial security. The truth is that if you want to secure your financial future, it’s best to start planning for it now.

If you were asked, "Lump sum or annuity lottery" and you would choose the annuity, you're in luck—you don’t have to wait to win the lotto. You can purchase a regular deferred annuity at any time.

These are powerful retirement planning tools because they can guarantee you a steady stream of retirement income for life!

Learn more about the annuities we offer at Canvas Annuity, and see how they could be a solid pillar of your retirement strategy. Talk to our non-commissioned representatives today.​

Citations

1. Hankins, S., Hoekstra, M., & Skiba, P. M. (2011). The ticket to easy street? The financial consequences of winning the lottery. Review of Economics and Statistics, 93(3), 961-969.
2. Herron, H. (2020). Winning the lottery: Should you take the annual payments or lump sum? USA Today.