Lottery Payout Options
Winning the lottery is a once-in-a-lifetime opportunity—such a significant amount of money can provide financial support for life.
Yet winning the lottery is not the end of the process. There’s quite a bit to understand with this new financial responsibility. After winning the lottery, you can choose between two payout options:
1. Lump sum payment: Receive all lottery winnings at one time. Receiving a lump sum payment of your winnings means an almost immediate supply of a staggering amount of money.
2. Annuity: Break the winnings into periodic payments, known as annuity payments. Annuity terms vary among different lotteries. Powerball and Mega Millions annuities last 29 years, breaking your payout into 30 annual installments.
Unlike a lump sum, receiving an annuity ensures a consistent income for up to three decades. You will typically have approximately 60 days to decide between these two options.
Of course, both choices come with advantages and disadvantages.
Lump Sum or Annuity – Advantages and Disadvantages
A lump sum payment carries several disadvantages despite the quick access to your winnings. Due to a lack of financial knowledge, the addictiveness of an extravagant lifestyle, and the difficulty of saying “no” to friends and relatives, lottery winners have a history of destructive spending. Investing wisely and growing long-term wealth will allow you and your family to live the rest of your lives comfortably.
Consider the tax implications of receiving such a large amount of cash. Lottery winnings are taxable by the federal and some state governments. Before you receive any money, the IRS automatically withholds 24% of your winnings (if over $5,000) to cover part of your federal tax bill. Some state tax agencies also withhold tax.
Then you’ll need to pay any remaining balance when you file your federal and state taxes. In 2023, the highest federal income tax rate is 37% on single filers earning $539,900 or more and taxpayers who are married and filing jointly earning $647,850 or more. You also must account for state taxes, which vary depending on where you live. California has the most expensive tax rate for high earners—13.3% in 2023—but doesn’t tax its own lottery or Mega Millions.
In other words, if your lottery winnings are in the tens of millions, you could end up paying millions of dollars to the tax authorities!
Those who choose a lump sum amount often fail to plan adequately. They live in extravagant luxury for a brief time before finding themselves in the same financial situation as before their winnings—or worse.
On the other hand, choosing an annuity can potentially keep you in a lower tax bracket. Plus, annuities earn interest, which means you could receive more money over time compared to opting for a lump sum payment. Annuities can also help winners keep their spending in check. You don’t receive your lottery winnings all at once, but annuities ensure a steady income stream for years or decades to come.
What if the annuity is not enough? Is there an option to change?
Once you choose an annuity, you can’t go back and switch to a lump sum payment of your lottery winnings. You also can’t change the terms of your agreement once they’ve gone into effect.
But if you need more cash, there are other options. You can get your cash sooner by selling your lottery winnings.
Selling Options: Full and Partial
There are two different ways to sell your lottery payments. You can sell the full amount and receive a lump sum, which pays you the full remaining value of your payments, minus a fee and taxes.
Alternatively, you can sell just a set number of payments. You’ll receive the equivalent of those payments in bulk (again, after accounting for buyer fees and taxes). You’ll still receive any unsold payments on schedule.
Lottery winnings are taxable in the year you receive them, so if you sell part of or all your winnings, you’ll have to pay federal and potentially state income tax. You’ll add that amount to your other taxable income, which could bump you up into a higher tax bracket.
Why People Choose to Cash Out Lottery Annuities
It’s perfectly legal to cash in lottery annuities and many people choose this option for several reasons. You can use the funds to help cover emergency expenses or make important purchases such as:
If you are considering selling lottery payments, here are a few points to keep in mind.
- The amount you receive for your annuity will be less than the annuity value itself.
- Selling all your lottery payments is not the only option. You can sell part of the annuity if that will cover your needs.
- Once you locate a buyer and determine to proceed with selling, you will need to attend a basic court proceeding. The judge will review the transaction to ensure that it’s in compliance with relevant state and federal laws and fair for you.
The Process of Selling Lottery Annuities
- Request a quote from a reputable company
- Discuss options with the company’s representative
- Accept the offer or look for others
- Appear in front of a judge to finalize the agreement
- Receive money in your bank account
Keep in mind the following to ensure that you’re dealing with a credible buyer and not one who will try to take advantage of people in need:
- Make sure that the company is tenured. A reliable company will have years of operation behind it to back up their claims.
- Ensure that the terms are explained to you right from the start.
- Confirm that the process complies with local and federal laws. A good buyer will be able to explain the relevant rules and regulations and show a clear knowledge of their field of work.
- Evaluate the company’s recommendations based on your financial needs—they should not automatically push you to sell all your payments.
States That Allow Selling Lottery Annuities
There are currently 28 states that allow residents to sell their lottery annuities, including:
- New Hampshire
- New Jersey
- New York
- West Virginia