Caught up in the rush of winning big, lottery winners can squander their payout rather than invest wisely.
What Is a Lottery Annuity?
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
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.
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?
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.
- 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/