One of the critical questions, whenever someone wins an enormous jackpot, is whether that lucky person should take their winnings in annual payments or accept a lump sum.
However, the choice is rarely as easy as it seems. Lottery winners thinking about taking the big cash payout all at once should keep in mind that there could be significant tax consequences.
A lump-sum payout offers a lot more money upfront, but in addition to federal income tax, winners also must worry about state income taxes. In some cases, the state can take a chunk of the money before you see it.
In California, for example, the state takes nearly 25% of your winnings before you see a penny. And if you’re a high-earning contestant taking the lump sum, the state portion could double or even triple your tax bill.
Mark Batchelder, a certified public accountant based in Delray Beach, Florida, says that a big payout is often a bad deal. Mark said, “In most cases, having the cash flow from an annuity is a better deal for most people because they get an income stream for life and it’s usually cheaper than the lump sum they’re offered.”
Annuities are like an insurance policy
In exchange for your one-time payout, which is called an “annuity settlement“, the insurance company gives you a guaranteed income stream for the rest of your life.
Mark said, “You have to have a lot of discipline to turn down that lump sum and live off your income stream, which may or may not last as long as you do.”
Lottery officials say the lump-sum versus annuity option is really a matter of personal choice
One notable exception is New Hampshire. The Granite State requires that lottery winners take their prize money in a lump sum and then put at least 60% of that money into an annuity. Some people argue that lottery winners should be forced to take the money in a lump sum because they need that money almost immediately. But others say that winners of big jackpots can be reckless with their money, making bad choices and squandering their winnings. Mark says the annuity is still a good deal, even if you’re cash-strapped. He explains that even if you don’t need the cash, the value of an annuity is the income stream for life.
Mark added, “If you use some of it for something stupid, you still have what’s left and that income stream is still there for the rest of your life.”
For some lottery winners, choosing between lump sum and annuity can be difficult.
But there are some basic things to consider before making that decision.
CPA Mark Batchelder says the first thing to consider is whether you’re going to need the money right away. Mark said, “If you’re going to need the cash for something within the next year or so, take the lump sum.” If you’re going to need the money within a few years or less, you’ll have a bigger tax bill. But Mark says you’ll still come out ahead.
He says you’re also better off taking the lump sum if you’re going to invest it, within certain limits. Mark explained, “If you think you can do better than the 10% to 13% that most annuities pay, take a lump sum.”
If you’re going to spend it, consider that an annuity gives you a guaranteed income stream for life. If you blow it all, you’ll be left with nothing.
Here are ideas where to invest my lottery money
- Invest in your own business, buy some stock with your lottery winnings. Most successful people have started their own businesses. Most of them will never tell you how they started, and that is a shame. Very few have been self-taught and skilled in the necessary experience. Some lottery winners have been able to start their own business, but most of them will fail because they don’t understand the necessary knowledge that the owner of the company has. You should be aware of the risks and know what you are doing before you start your own business.
- Invest in real estate. If you can afford to buy a rental property then you can be sure of a good return, but it is a risky investment. You should not invest in the property unless you have been involved for at least 3 years and know exactly which market you are investing in.
- Education, take courses, upgrade yourself. If you spend money on education you can save money and get more knowledge in one go. If you spend your money on a course you can get a new job and get ahead in life.
- Invest in your health, buy some exercise equipment or a gym membership. Again, your health is a priority. You will not be able to enjoy your life if you get sick. If you buy a gym membership you will get in shape and have more energy to spend on other things in life.
- Spend time with your family and friends, time is the most precious thing we have, but most lottery winners forget that it is only temporary. If you spend your money wisely you will never be disappointed. When you buy time with someone else, you can create memories that will last a lifetime. Those who invest time often learn very useful things and can even improve their skills.
In conclusion, there are many things you can do with your lottery money, but in general, you should take your time and research what is best. Everyone has a different opinion, and you should be aware of what you are doing. Don’t rush into anything, you only get one life.