Lottery Payout Options
Winning the lottery is a once-in-a-lifetime opportunity which comes only to a lucky few, just like hitting the jackpot in a casino. After all, 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, there are two payout options to choose from:
1. Lump sum payment: Receive complete lottery winnings at one time. Receiving a lump sum amount for 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. These fixed annuities can last for as long as 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 make a decision between these two options.
Of course, both choices come with advantages and disadvantages.
Lump Sum or Annuity – Advantages and Disadvantages
While a lump sum payment could lead to access to a significant amount of money, there are disadvantages.
One of them is that it could lead you to spending without control, potentially eliminating the opportunity to live the rest of your life comfortably. When all of your cash gets spent on luxury purchases or wild vacations, there are fewer investments and opportunities to grow long-term wealth can easily be missed.
The tax implications of being the recipient of such a large amount of cash should also be considered because lottery winnings are taxable by both federal and state governments. Before you receive any money, the IRS automatically withholds 25% of your winnings to cover part of your tax bill. Then you’ll need to pay any remaining balance when you file your federal and state taxes. In 2022, the highest 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, for instance, has the most expensive tax rate for high earners, which is 13.3% in 2022.
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 and end up living in luxury for a brief time before finding themselves in the same financial situation as before their winnings.
On the other hand, choosing an annuity can potentially keep you in a lower tax bracket. Plus, annuities earn interest, which means you could actually receive more money over time compared to opting for a lump sum payment. Another benefit is that most winners are able to keep their expenses in check as well. You don’t receive your lottery winnings all at once, but it does ensure a steady income stream for 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. Unfortunately, you 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 actually two different ways to sell your lottery payments. You can either 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). Then you’ll start receiving your standard payments again when the time comes.
Lottery winnings are taxable in the year you receive them, so if you sell part or all of your winnings, you’ll have to pay both federal and state income tax. You’ll add that amount to your other taxable income, which could potentially bump you up into a higher tax bracket.
Why People Choose to Cash Out Lottery Annuity
It’s perfectly legal to cash in lottery annuities and many people choose this option for a number of 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 of your lottery payments is not the only option. You can sell part of the annuity if that will be sufficient to cover 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 that you are getting a fair deal.
The Process of Selling Lottery Annuity
- 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
There are a few points to keep in mind to ensure that you are 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 is in compliance 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, rather than automatically pushing you to sell all of your payments.
States That Allow Selling Lottery Annuity
There are 28 states that currently allow residents to sell their lottery annuities. Check to see if your state is included:
- New Hampshire
- New Jersey
- New York
- West Virginia