Lottery Annuities

Caught up in the rush of winning big, lottery winners can squander their payout rather than invest wisely.

What Is a Lottery Annuity?

If you’re one of the lucky few who has won the lottery, one of the most important decisions you can make is how to receive your winnings. A lottery annuity is one of two payout options lottery winners receive.

A lump sum payment is the second payout option. While a lump sum provides the most flexibility and immediate access to winnings, receiving a large amount of money all at once can cause poor financial decisions and bad investment opportunities. For this reason, many winners choose long-term lottery annuities that provide a consistent stream of income and limited access to large increments of cash.

Lottery annuities contracts can be highly customizable to suit the winner’s needs. For example, if you wanted to access some of your money now while simultaneously investing the remainder, you can purchase an immediate variable annuity with your winnings. Contracts can customize the amount you receive in each disbursement and how frequently disbursements occur.

Lump Sum vs. Annuity Payout

Many lotteries allow winners to choose between a one-time lump sum payment or an annuity. Each option has its own set of pros and cons.

Lump sums are popular options because they allow for flexibility, including immediate access to winnings and the opportunity to invest in subaccounts and other financial tools. However, this financial payout option can lead to extravagant spending habits and uninformed investing. Choosing a lump sum also means winners will receive an amount significantly lower than the initial value because taxes will also be due in a lump sum.

An annuity payout eliminates some of these cons because it provides a stream of income over a longer period of time. This allows for taxes to be taken out gradually and typically in a lower bracket than lump sum winnings. Interest can also accrue on assets in an annuity. A long-term annuity payout has some disadvantages. Most notably, annuities are inflexible, meaning once the contact is written, it can’t be changed. In the event a winner needs immediate cash or a larger portion of their winnings for a financial or medical emergency, they will be unable to access extra funds without selling their annuity.

Lottery Taxes

Lottery winnings are taxable income, and the amount varies on the payout option. If you receive your winnings in a lump sum, the money will be taxed at the time it’s won. If the lottery award is $10 million or higher, a lump sum payout would require taxes to be removed from this initial amount in the same year it is received. In addition, receiving lottery winnings more than $10 million can place the winner in a higher tax bracket, causing a higher tax payment.

Conversely, a lottery annuity payout will spread out taxes with every yearly payment. Selecting an annuity can be tax advantageous because receiving smaller, periodic payments can put a winner in a lower tax bracket. Lottery annuities are taxed based on the tax rates at the time of the withdrawal, which may or may not be advantageous to a winner, depending how current tax rates compare to the rates when they won the lottery.

What Happens to Lottery Winnings When You Die?

Upon receiving lottery winnings, winners may be able to select a beneficiary in the unfortunate event they die before receiving the full value of their lottery. Similar to a death benefit, the chosen beneficiary will assume rights and tax responsibilities to the lottery winnings. Rules vary by state, but in some cases only one beneficiary can be chosen.

If there are multiple beneficiaries, or if none are selected, the remaining assets will be sent to the winner’s estate and distributed to any heirs. If there are no heirs, lottery assets are distributed according to the state laws and regulations.

Sources

Bennett, L. (n.d.). What Happens to Lottery Winnings if You Die Before Payments Are All Paid Out? Retrieved from http://budgeting.thenest.com/happens-lottery-winnings-die-before-payments-paid-out-34073.html
Hickey, W. (2013, September 25). Lump Sum or the Annuity: Here’s Which One To Choose If You Win The Lottery. Retrieved from http://www.businessinsider.com/should-you-take-the-annuity-or-the-lump-sum-if-you-win-the-lottery-2013-9
The Motley Fool. (n.d.). Are Lottery Annuity Payments Transferable? Retrieved from https://www.fool.com/knowledge-center/are-lottery-annuity-payments-transferable.aspx
Pagliarini, R. (2017, March 28). Lottery Winnings: Take the Lump Sum or Annuity? Retrieved from http://www.investopedia.com/advisor-network/articles/lottery-winnings-take-lump-sum-or-annuity/
Pennsylvania Lottery. (2003, July 23). What happens if I win an annuity jackpot and die before all the installments have been paid? Retrieved from https://lottery-pa.custhelp.com/app/answers/detail/a_id/1153/~/what-happens-if-i-win-an-annuity-jackpot-and-die-before-all-the-installments
Ritchie, A. (n.d.). Lottery Annuity Payments. Retrieved from https://www.annuity.org/annuities/types/lottery/
Wolff-Man, E. (2017, August 23). Should Powerball Jackpot Winners Take the Annuity or the Lump Sum? Retrieved from http://time.com/money/4172759/powerball-lottery-annuity-or-lump-sum/

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