Why do most lottery winners take the lump sum?

The advantage of a lump sum is certainty — the lottery winnings will be subjected to current federal and state taxes as they exist at the time the money is won. Once taxed, the money can be spent or invested as the winner sees fit.

annuity.org - Lottery Payout Options: Annuity vs. Lump Sum

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Annuity.org has been providing reliable, accurate financial information to consumers since 2013. We adhere to ethical journalism practices, including presenting honest, unbiased information that follows Associated Press style guidelines and reporting facts from reliable, attributed sources. Our objective is to deliver the most comprehensive explanation of annuities, structured settlements and financial literacy topics using plain, straightforward language. Our Partnerships, Vision and Goals We partner with CBC Settlement Funding, a market leader with over 15 years of experience in the settlement purchasing space. Our relationship with CBC allows us to facilitate the purchase of annuities and structured settlements from consumers who are looking to get a lump sum of cash immediately for their stream of monthly payments. When we produce legitimate inquiries, we get compensated, in turn, making Annuity.org stronger for our audience. Readers are in no way obligated to use our partners’ services to access Annuity.org resources for free. CBC and Annuity.org share a common goal of educating consumers and helping them make the best possible decision with their money. CBC is a Better Business Bureau-accredited company with an A+ rating and a member of the National Association of Settlement Purchasers (NASP), a national trade association that promotes fair, competitive and transparent standards across the secondary market. Additionally, Annuity.org operates independently of its partners and has complete editorial control over the information we publish. Our vision is to provide users with the highest quality information possible about their financial options and empower them to make informed decisions based on their unique needs. Our expert reviewers hold advanced degrees and certifications and have years of experience with personal finances, retirement planning and investments. Our expert reviewers review our articles and recommend changes to ensure we are upholding our high standards for accuracy and professionalism. These reviewers are industry leaders and professional writers who regularly contribute to reputable publications such as the Wall Street Journal and The New York Times. Annuity.org partners with outside experts to ensure we are providing accurate financial content. Michael J. Boyle began his career in the securities business in 2011 as a registered financial professional. Over his tenure, he’s worked with asset classes including equities, fixed income, CDs, mutual funds, futures, options and foreign currency. Managing editor Emily Miller is an award-winning journalist with more than 10 years of experience as a researcher, writer and editor. Throughout her professional career, Emily has covered education, government, health care, crime and breaking news for media organizations in Florida, Washington, D.C. and Texas. She joined the Annuity.org team in 2016. Elaine Silvestrini is an advocate for financial literacy who worked for more than 25 years in journalism before joining Annuity.org as a financial writer.

Lottery Payout Options

Before lottery winners can collect jackpots, they must usually make one important decision: Should they collect their winnings all at once or over a long period of time? The first option is called a lump-sum award. That’s when the winner receives all of the lottery winnings after taxes at one time. The second option is an annuity. Although annuities established by the lottery commissions have been informally dubbed “lottery annuities,” in reality, annuity contracts created for the purpose of distributing prize money typically fall under the safest category of annuities: fixed immediate. Each state and lottery company varies. Powerball, for example, offers winners the choice of a lump-sum payout or an annuity of 30 payments over 29 years. Mega Millions offers lump-sum payouts or annuities. The annuity offers an initial payment followed by 29 annual payments. Each payment is 5 percent larger than the previous one. Did you know? Lottery winning payments made using annuities are sometimes referred to as “lottery annuities,” but they are actually structured as period-certain fixed immediate annuities backed by the U.S. government.

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Lump Sum vs. Annuity for Lottery Winners

While both options guarantee a lottery payout, the lump-sum and annuity options offer different advantages. Choosing a lump-sum payout can help winners avoid long-term tax implications and also provides the opportunity to immediately invest in high-yield financial options like real estate and stocks.

Fact Electing a long-term annuity payout can have major tax benefits.

Federal taxes reduce lottery winnings immediately. But winners who take annuity payouts can come closer to earning advertised jackpots than lump-sum takers. Consider the case of the August 2022 Powerball jackpot that had reached $206.9 million at the time that a single winning ticket was sold in Pennsylvania. Most big-prize winners opt to take the lump sum payment when they win. That would have been $122.3 million for this jackpot. But the winner also could have opted to annuitize their payout, receiving 30 payments over 29 years. That path would have given them the full $206.9 million, paid out over three decades. Those payments include interest that will accumulate from investments over the life of the annuity. Annuities also protect winners who might otherwise spend everything after a lump-sum payment. Some winners may squander their funds all at once or not invest it properly, leading them to bankruptcy or other financial troubles. An annuity isn’t for everyone. Annuities are inflexible, prohibiting winners from changing the payout terms in the case of an unexpected financial or family emergency. The annual payments may prevent a winner from making large investments. Such investments generate more cash compared to the amount of interest earned on the annuities.

Winners Face Tax Issues

Taxes also influence many lottery winners’ decisions on whether to choose a lump-sum payout or an annuity. The advantage of a lump sum is certainty — the lottery winnings will be subjected to current federal and state taxes as they exist at the time the money is won. Once taxed, the money can be spent or invested as the winner sees fit. The advantage of the annuity is the exact opposite — uncertainty. As each annuity payment is received, it will be taxed based on the then-current federal and state rates. Those who choose the annuity option for tax reasons are often betting that tax rates in the future will be lower than the current rates. However, should they regret their decision in choosing an annuity payout, lottery winners do have the option of selling their annuity payments for a discounted lump sum.

Can I Sell My Lottery Annuity?

If you are interested in selling some or all of your annuity payments, you should contact your lottery company to clarify if the annuity can be sold. Expand There are currently 28 states that allow after-market sales of lottery annuities for a lump-sum payment. Winners also can decide to sell all or part of their future payments. The terms of the sale, including the total amount, are up for negotiation. The lottery winner must have court approval for the transaction to take place. A judge decides whether such a sale is in the person’s best interest. See what your future payments could be worth in cash Turn your future payments into cash you can use right now. Get started with a free estimate and see what your payments are worth today! Get Your Free Estimate

How Much Is My Lottery Annuity Worth?

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If you want an estimate of the sales value of your lottery annuity, you can enter the information from your contract into this annuity calculator to get a custom quote that we stand behind.

What Happens to My Lottery Annuity When I Die?

In spite of rumors that the government gets to keep the money, lottery annuities are generally passed to the winner’s heirs. In fact, some lottery companies allow for a transfer of the funds only when the annuity owner dies. In this instance, any remaining assets will be disbursed to the estate or a living beneficiary until their death or the end of the contract. Some lotteries will cash out an annuity prize for an estate, to make it easier for the estate to distribute the inheritance and to pay federal estate taxes when they apply. In order for the lottery to do this, it has to be allowed in the state where the ticket was purchased.

The Process of Selling Annuity Payments

Lottery winners who decide to sell their periodic payments must first learn if they are allowed to do so. That is often determined by the state in which the lottery was won and not by the state in which the lottery winner lives. Sometimes there are ways of finding a loophole, a task best suited for a personal attorney.

Who Buys Lottery Payments?

Typically, two types of companies purchase long-term lottery payouts: factoring companies and insurance companies. These are the same companies that purchase settlements from sellers who collect personal injury settlements, mortgage notes and other kinds of long-term payouts. Factoring companies offer lottery winners immediate cash for their annuity contracts. They are buying the lottery winner’s future payments. The cash payment is less than the total of the scheduled annuity payments. The company should offer you a quote in writing at no charge. The annuity purchasing companies are part of a very competitive, heavily regulated market. Ask the company where they are certified and licensed and how long the quote is good. Ask about any fees and how long the company has been in business. When selecting a buying company, it’s usually best to look for a company with experience and that has people who take the time to explain the written offer. Do not cave to pressure to sign something before you fully understand and agree. The company you choose will draft a contract detailing the proposed agreement. The proposal has to be approved by a judge, who will determine if it is in the best interests of the lottery winner. The annuity purchasing company will take the contract to the judge. We recommend our partners, who have been vetted by experts in the field. They have helped thousands of people who need to get cash quickly.

Tax Obligations of Selling Lottery Payments

Someone who cashes in some or all future lottery payments will owe federal income taxes. This differs from the sales of structured settlements from personal injury lawsuits. In those cases, buyouts are tax-free. This article helped me understand the aspects of putting winnings into an annuity instead of lump sum, which I would rather do. With this choice, winnings would generate on a yearly basis, most likely easing the tax burden and assessments. Upon my death, the winnings would generate income for my children and grandchildren. Thank you.

annuity.org - Lottery Payout Options: Annuity vs. Lump Sum

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