While the odds of winning any type of lottery are typically quite small, the reality is that there are thousands of people every year in the United States who hear their lucky numbers called. But prior to walking away with any cash, most of these individuals will have to decide whether they want to take a single lump sum payout, or instead to take their winnings as a series of payments over time.
While each of these options will guarantee that the winner receives their prize, choosing one of these options over another could end up netting much more spendable cash – and one of the best ways to help decide which is the better alternative is to use a lottery calculator.
Taking a Lump Sum Lottery Payout versus a Series of Payments
If you’re the winner of a lottery, it may be tempting to take the whole amount of the payout all at one time. And there are some very good reasons for this. First, having all of the cash in hand may allow you to invest in a number of options that can further enhance the value and/or produce a steady stream of income over time.
Added to that, the lump sum payout option can provide you with something else – certainty. As the old saying goes, “a bird in the hand is worth two in the bush.” Or in this case, money in your pocket right now won’t require you to wait for payments later.
In addition, if you take the lump sum lottery payout, it could help you to avoid some long-term tax implications. For instance, given that today’s top federal income tax rate is just 37%, you may find that paying all of the taxes right away could prevent you from paying taxes at a higher rate down the road.
Over the past 100 years or so, the top federal income tax rate in the United States has been as low as 7%, and in excess of 90%. In fact, since the year 1913, this rate has been 70% or higher forty-nine times! So, by taking a regular payout over time, you could subject yourself to unknown – and likely higher – tax rates, and in turn, netting out less for you to spend or invest.
Top Federal Income Tax Rates 1913 – 2020
Source: Inside Gov (http://federal-tax-rates.insidegov.com/)
On the other hand, if you go with the lump sum payment alternative, you will be subject to all of the taxation for the year you received the payment – and depending on how much the jackpot is, this could also result in a significant reward for Uncle Sam!
Plus, by going with a series of payments – which is oftentimes over a period of 29 years – the regular payouts could include interest that accumulates from investments over the life of the annuity.
Other Potential Options for Lottery Winnings
In some cases, if a lottery winner decides to take the series of annuity payments – but they later decide that they would rather have a lump sum – it may be possible that they could sell the remainder of these payments.
There are actually several U.S. states that allow the after-market sale of lottery annuities in return for a lump sum payment. It is important to note, though, that the amount of the lump sum you are paid in this instance will not be equal to the total of all your remaining payments that are due.
Which Lottery Payout Option is Best for You?
If you’re searching for the right payout option on your winnings, using a lottery calculator could help. This financial vehicle can show you the amount of money you could net out after taxes, based on which state you reside in.
Some lottery calculators will also compute for you the amount of your tax liability – and it will do so for both the lump sum and the long-term payment options so you can compare the difference.
Want to learn more about regular income payments and how to determine which alternative is right for you?
Annuity Gator can help. Our mission is to educate people on how annuities work, and whether or not an annuity is right for you, based on your short and long-term financial objectives. So, if you’d like to set up a time to talk with an annuity specialist, please feel free to reach out to us by calling (888) 440-2468, or by sending us an email via our secure contact form. We look forward to assisting you.