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
Year | Rate | Year | Rate |
---|---|---|---|
2018-2020 | 37 | 1950 | 84.36 |
2013-2017 | 39.6 | 1948-1949 | 82.13 |
2003-2012 | 35 | 1946-1947 | 86.45 |
2002 | 38.6 | 1944-1945 | 94 |
2001 | 39.1 | 1942-1943 | 88 |
1993-2000 | 39.6 | 1941 | 81 |
1991-1992 | 31 | 1940 | 81.1 |
1988-1990 | 28 | 1936-1939 | 79 |
1987 | 38.5 | 1932-1935 | 63 |
1982-1986 | 50 | 1930-1931 | 25 |
1981 | 69.125 | 1929 | 24 |
1971-1980 | 70 | 1925-1928 | 25 |
1970 | 71.75 | 1924 | 46 |
1969 | 77 | 1923 | 43.5 |
1968 | 75.25 | 1922 | 58 |
1965-1967 | 70 | 1919-1921 | 73 |
1964 | 77 | 1918 | 77 |
1954-1963 | 91 | 1917 | 67 |
1952-1953 | 92 | 1916 | 15 |
1951 | 91 | 1913-1915 | 7 |
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.